Option Trading: How To Achieve Superior Returns As A Trader
What is option trading?
Option trading is a way of entering a market with a relatively small upfront investment, but with the possibility of netting you a much bigger return on investment than if you had traded in the underlying instrument. What you are doing in option trading is purchasing the right to buy or sell the underlying security within a specified time period.
During that time you are free to complete the purchase or sale at the price decided initially. If you do not honor the contract the premium that you pay can be lost. Time period in option trading contracts are generally about a month and are settled at dates that are fixed by the stock exchanges that could be the third Saturday of the month. Once this period is over, as an option trader you have lost all rights to make the trade and your premium remains forfeit.
Concepts
You would have to be deeply involved in stock market trade to understand the difference between stock trading and option trading. If you as a newcomer still want to be involved in option trading you must make an effort to understand terminology used and the ideas behind the concept. The terms by used by traders in option trading are quite specific and have their own meanings. When you go in for option trading you would have to decide a price for the stock you want to trade in , the number of shares, and the time period in which you would make such a trade.
The option trader who buys options has no obligation to act whatsoever, and is only obligated to pay the premium to buy the option in the first place. He retains the right to exercise his options in the future, should the opportunity arise and should he wish to do so. The option "exercise price" locks in the specified price at which the underlying stock can be bought or sold for the lifetime of the option. If you are the owner of a call option, giving you the right to buy stock at the exercise price, and the stock price rises above the exercise price during the lifetime of your call option, you can exercise your option to acquire the stock at that exercise price instead of the prevailing price in the market, which may be far higher. In other words, you are buying stock cheaper than the market value.
The stock price may drop or just remain lower the exercise price, the buyer of call option cannot use at all, but can also sell the option and in that way exit the position at a loss or breakeven. Alternatively, he can hold onto it with the expectation that the market value of the option will rise, dependent upon factors such as the underlying stock price, volatility, time to expiry and more.
When you know what you are doing, there are also far more trading opportunities with relatively lower risk compared to merely buying or selling the underlying. Usually, the options of leverage can control a bulk amount of the original stock for relatively small capital expenditure compared with buying or selling the underlying tool. This makes options more attractive because there exists higher profits on investment than just trading the original instrument.
What do the words mean?
Option trading for stocks is generally in blocks of 100 shares
The option giving the right to buy the underlying instrument at the strike price is called the "call" option.
The option giving the right to sell the underlying instrument at the strike price is called the "put" option.
The price set in the option trading contract at which the underlying may be bought or sold is called the "strike price".
In the money: When the strike price is below the existing price of the stock and you exercise a call option, and when the strike price is above the existing price of the stock and you exercise a put option.
You are considered to be "out of the money" if your strike price is more than the existing price at the time of the option and you put in a call option, or you put in a put option and the strike price is lower than the existing price. - 23208
Option trading is a way of entering a market with a relatively small upfront investment, but with the possibility of netting you a much bigger return on investment than if you had traded in the underlying instrument. What you are doing in option trading is purchasing the right to buy or sell the underlying security within a specified time period.
During that time you are free to complete the purchase or sale at the price decided initially. If you do not honor the contract the premium that you pay can be lost. Time period in option trading contracts are generally about a month and are settled at dates that are fixed by the stock exchanges that could be the third Saturday of the month. Once this period is over, as an option trader you have lost all rights to make the trade and your premium remains forfeit.
Concepts
You would have to be deeply involved in stock market trade to understand the difference between stock trading and option trading. If you as a newcomer still want to be involved in option trading you must make an effort to understand terminology used and the ideas behind the concept. The terms by used by traders in option trading are quite specific and have their own meanings. When you go in for option trading you would have to decide a price for the stock you want to trade in , the number of shares, and the time period in which you would make such a trade.
The option trader who buys options has no obligation to act whatsoever, and is only obligated to pay the premium to buy the option in the first place. He retains the right to exercise his options in the future, should the opportunity arise and should he wish to do so. The option "exercise price" locks in the specified price at which the underlying stock can be bought or sold for the lifetime of the option. If you are the owner of a call option, giving you the right to buy stock at the exercise price, and the stock price rises above the exercise price during the lifetime of your call option, you can exercise your option to acquire the stock at that exercise price instead of the prevailing price in the market, which may be far higher. In other words, you are buying stock cheaper than the market value.
The stock price may drop or just remain lower the exercise price, the buyer of call option cannot use at all, but can also sell the option and in that way exit the position at a loss or breakeven. Alternatively, he can hold onto it with the expectation that the market value of the option will rise, dependent upon factors such as the underlying stock price, volatility, time to expiry and more.
When you know what you are doing, there are also far more trading opportunities with relatively lower risk compared to merely buying or selling the underlying. Usually, the options of leverage can control a bulk amount of the original stock for relatively small capital expenditure compared with buying or selling the underlying tool. This makes options more attractive because there exists higher profits on investment than just trading the original instrument.
What do the words mean?
Option trading for stocks is generally in blocks of 100 shares
The option giving the right to buy the underlying instrument at the strike price is called the "call" option.
The option giving the right to sell the underlying instrument at the strike price is called the "put" option.
The price set in the option trading contract at which the underlying may be bought or sold is called the "strike price".
In the money: When the strike price is below the existing price of the stock and you exercise a call option, and when the strike price is above the existing price of the stock and you exercise a put option.
You are considered to be "out of the money" if your strike price is more than the existing price at the time of the option and you put in a call option, or you put in a put option and the strike price is lower than the existing price. - 23208
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posted by X - Men @ 2:41 AM
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