The Basics of Option Trading
Options are a way of controlling, not owning, the expensive shares of a corporation for a fraction of the cost of those shares. Options provide traders the chance to participate in the markets with a lot less cash as well as to protect against potential stock investment losses. However, there are many options traders who lose all their money in a very short period of time because stock options expires worthless if the underlying stock did not move in accordance to expectation. When you purchase stocks, you can hold on to it for as long as you want to if the stock did not go up.
The benefits of option trading:
With shares, there is only one stock movement that makes you money- upward trend!. With options, you can make money when the share prices are moving upwards and downwards.
Liquidity- There is always a market to buy from and to sell to.
Leverage- Options enable you to profit by controlling a large number of shares with a relatively small investment.
There is limited risk in option trading as it does not require as much finance as stock trading.
Large movement and large profits- In fact, when a stock moves 1%, its stock options could move by as much as 10%!
There are two types of options, namely call option and put option.
A call gives the holder the right, not the obligation, to buy an asset at the strike price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires. As the underlying stock rises, the long call increases in value because it gives the option holder the right to buy the underlying stock at its lower strike price. An investor should go long a call option in a rising or bull market. If you choose to sell or go short a call option, you are selling the right to buy the underlying stock at a specific strike price until the expiration date. A short call strategy should be applied in a bearish market.
A put gives the holder the right, not the obligation, to sell an asset at a strike price within a specific period of time. Puts are very similar to having a short position on a stock. As the underlying stock falls, the long put becomes more valuable because it gives you ( or the person you sell it to) the right to sell the underlying stock at the higher strike price. Investor should go for long put options in a bearish or falling market.
An option is either making money (in-the-money), breaking even (at-the-money) or losing money (out-of-the-money).Hence, if the current market price of the underlying stock is more than the strike price, the call option is in-the-money. If the current market price of the underlying stock is lower than the strike price, the call option is out-of-money. If the current market price is the same as the strike price, the call option is at-the-money. Put option is in-the-money when the strike price is higher than the market price of the underlying stock. A put option is out-of-the-money when the underlying stock is greater than the strike price.
The benefits of option trading:
With shares, there is only one stock movement that makes you money- upward trend!. With options, you can make money when the share prices are moving upwards and downwards.
Liquidity- There is always a market to buy from and to sell to.
Leverage- Options enable you to profit by controlling a large number of shares with a relatively small investment.
There is limited risk in option trading as it does not require as much finance as stock trading.
Large movement and large profits- In fact, when a stock moves 1%, its stock options could move by as much as 10%!
There are two types of options, namely call option and put option.
A call gives the holder the right, not the obligation, to buy an asset at the strike price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires. As the underlying stock rises, the long call increases in value because it gives the option holder the right to buy the underlying stock at its lower strike price. An investor should go long a call option in a rising or bull market. If you choose to sell or go short a call option, you are selling the right to buy the underlying stock at a specific strike price until the expiration date. A short call strategy should be applied in a bearish market.
A put gives the holder the right, not the obligation, to sell an asset at a strike price within a specific period of time. Puts are very similar to having a short position on a stock. As the underlying stock falls, the long put becomes more valuable because it gives you ( or the person you sell it to) the right to sell the underlying stock at the higher strike price. Investor should go for long put options in a bearish or falling market.
An option is either making money (in-the-money), breaking even (at-the-money) or losing money (out-of-the-money).Hence, if the current market price of the underlying stock is more than the strike price, the call option is in-the-money. If the current market price of the underlying stock is lower than the strike price, the call option is out-of-money. If the current market price is the same as the strike price, the call option is at-the-money. Put option is in-the-money when the strike price is higher than the market price of the underlying stock. A put option is out-of-the-money when the underlying stock is greater than the strike price.
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