Option Trading: How To Achieve Superior Returns As A Trader
What is option trading?
You want to enter the stock market but would like to limit the investment that you would have to make. Then you need to try option trading. It could give you a much bigger bang for your buck. Option trading commits you to paying a premium in return for a right to buy or sell a specified amount of shares within a specified time period.
In option trading with stock for example, an option gives you the right to purchase or sell a fixed number of shares, determined by the option contract specification, within a specified time period and at a specified price. Hence, as an option buyer, you either execute that trade within the specified time period or forfeit the premium you paid, or else you sell the option itself for either a profit or loss depending on what has happened in the intervening period. Option trading expirations for a given option series are generally spaced one month apart, and the termination date is generally the third Saturday of the month or any other day decided by the Stock Exchanges. Once that date has expired, all rights of the trader cease and he cannot use the option to buy or sell that particular underlying stock.
Concepts
Stock trading and option trading are quite dissimilar. Understand the ideas and the terms behind option trading if you choose that as the way to trade in the stock market. The words used are quite specific and may sound like Greek and Latin to the newcomer. As on option trader, you would have the right to buy or sell a particular stock in the volume agreed on at a fixed price, as long as you execute the trade within the time that has been specified.
In option trading there is no binding that you have to honor the commitments made, but the premium that you pay to retain these rights to exercise your option could be forfeited. The payment of the premium enables you to lock in the price of the stock for the time period agreed to, and if you find that during this time the value of the stock has appreciated, you are free to make the balance payment and take delivery of the stocks. Conversely if the value goes down and you feel that it is not worthwhile buying the agreed stocks you could cancel the option and forget about the premium payment that you made. This could be construed as a loss, but would be much less than the loss you would have made if you had purchased the agreed stock at the start of the period at the price that was prevailing at the time.
Should the stock price fall or merely remain below the exercise price, the call option buyer cannot exercise the option at all, but can either sell the option and thereby 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.
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. There are also far more trading opportunities with lower risks that can be known only when you know what you are doing?
Terms in usage
Option trading for stocks is generally in blocks of 100 shares
Call option: The option giving the right to buy the underlying instrument at the strike price.
Put option: The option giving the right to sell the underlying instrument at the strike price
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.
Similarly, if while option trading, you own calls and the strike price is higher than the current market price, your call options are said to be "out of the money". With put options, you are "out of the money" if your strike price is lower than the current price. - 23222
You want to enter the stock market but would like to limit the investment that you would have to make. Then you need to try option trading. It could give you a much bigger bang for your buck. Option trading commits you to paying a premium in return for a right to buy or sell a specified amount of shares within a specified time period.
In option trading with stock for example, an option gives you the right to purchase or sell a fixed number of shares, determined by the option contract specification, within a specified time period and at a specified price. Hence, as an option buyer, you either execute that trade within the specified time period or forfeit the premium you paid, or else you sell the option itself for either a profit or loss depending on what has happened in the intervening period. Option trading expirations for a given option series are generally spaced one month apart, and the termination date is generally the third Saturday of the month or any other day decided by the Stock Exchanges. Once that date has expired, all rights of the trader cease and he cannot use the option to buy or sell that particular underlying stock.
Concepts
Stock trading and option trading are quite dissimilar. Understand the ideas and the terms behind option trading if you choose that as the way to trade in the stock market. The words used are quite specific and may sound like Greek and Latin to the newcomer. As on option trader, you would have the right to buy or sell a particular stock in the volume agreed on at a fixed price, as long as you execute the trade within the time that has been specified.
In option trading there is no binding that you have to honor the commitments made, but the premium that you pay to retain these rights to exercise your option could be forfeited. The payment of the premium enables you to lock in the price of the stock for the time period agreed to, and if you find that during this time the value of the stock has appreciated, you are free to make the balance payment and take delivery of the stocks. Conversely if the value goes down and you feel that it is not worthwhile buying the agreed stocks you could cancel the option and forget about the premium payment that you made. This could be construed as a loss, but would be much less than the loss you would have made if you had purchased the agreed stock at the start of the period at the price that was prevailing at the time.
Should the stock price fall or merely remain below the exercise price, the call option buyer cannot exercise the option at all, but can either sell the option and thereby 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.
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. There are also far more trading opportunities with lower risks that can be known only when you know what you are doing?
Terms in usage
Option trading for stocks is generally in blocks of 100 shares
Call option: The option giving the right to buy the underlying instrument at the strike price.
Put option: The option giving the right to sell the underlying instrument at the strike price
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.
Similarly, if while option trading, you own calls and the strike price is higher than the current market price, your call options are said to be "out of the money". With put options, you are "out of the money" if your strike price is lower than the current price. - 23222
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