Have you heard about options trading. The first question that many people who when exploring diversified investment opportunities ask themselves is what is options trading. Unfortunately, there seems to be no easier language to explain this trading, more so if you have never traded in the stock exchange. This article however tries to shed as much light as possible in this seemingly complicated investment opportunity.
Basically, the contracts present the trader with a right (but not an obligation) to take some action (call or put) within a predetermined period. The trader can either buy or sell shares of the underlying stock within this predetermined period. Options are divided into two larger categories; calls and puts.
The calls and puts consist of two divisions. A party purchases the selection and a party sells the selection. Each contributing division in options trade has its hazard/remuneration system. The option purchaser holds an extended position whereas the option seller holds a diminutive position.
A theoretical proposition works well when explaining options trading to beginners. Let's say you are in a situation where you want to buy a real estate property. You identify the property and talk to the owner, but since you do not have the money to buy the property at that particular moment, you strike a deal with the property owner that you will buy the house at the end of three months at a price of $300,000. In return, the owner asks you to pay him $3,000 as an option.
Assume further that two different things that are correlated to the house happen within the span of the three months. One, it is discovered that the house was Mj's secret residence. This escalates the cost of the house to $4,000,000. Since you have a deal to buy at $200,000, the owner is obligated to sell at that very amount. On the other hand, maybe it is discovered that ghosts roam the inside of the house. You do not longer wish to buy the house. But since you bought an option, you lose the $3,000 option cash.
This theoretical example illustrates how exactly this form of trade works. When you buy an option you have a right to do something but you cannot be obligated to do it. In simple terms, an option is just an agreement which focuses on an underlying asset. In the example, the property is the underlying asset. However, in most cases, the underlying asset is usually a stock or index.
A call guarantees the holder of the option the right to purchase an asset at a certain pre-agreed price within a predetermined period. The buyer postulates that the price of the stock will increase progressively before the option expires. A put on the other hand gives the option holder the right to sell an asset at a particular price within a given period. Buyers of puts option hope that the price will fall before the option reaches its expiration date.
You can choose to participate in this form of trading as one of the four main participants. The other important lingo to note is that traders who buy options (either calls or puts) are called holders while the sellers of options are called writers. Hopefully, this article has answered one of the most commonly asked questions, what is options trading.
Basically, the contracts present the trader with a right (but not an obligation) to take some action (call or put) within a predetermined period. The trader can either buy or sell shares of the underlying stock within this predetermined period. Options are divided into two larger categories; calls and puts.
The calls and puts consist of two divisions. A party purchases the selection and a party sells the selection. Each contributing division in options trade has its hazard/remuneration system. The option purchaser holds an extended position whereas the option seller holds a diminutive position.
A theoretical proposition works well when explaining options trading to beginners. Let's say you are in a situation where you want to buy a real estate property. You identify the property and talk to the owner, but since you do not have the money to buy the property at that particular moment, you strike a deal with the property owner that you will buy the house at the end of three months at a price of $300,000. In return, the owner asks you to pay him $3,000 as an option.
Assume further that two different things that are correlated to the house happen within the span of the three months. One, it is discovered that the house was Mj's secret residence. This escalates the cost of the house to $4,000,000. Since you have a deal to buy at $200,000, the owner is obligated to sell at that very amount. On the other hand, maybe it is discovered that ghosts roam the inside of the house. You do not longer wish to buy the house. But since you bought an option, you lose the $3,000 option cash.
This theoretical example illustrates how exactly this form of trade works. When you buy an option you have a right to do something but you cannot be obligated to do it. In simple terms, an option is just an agreement which focuses on an underlying asset. In the example, the property is the underlying asset. However, in most cases, the underlying asset is usually a stock or index.
A call guarantees the holder of the option the right to purchase an asset at a certain pre-agreed price within a predetermined period. The buyer postulates that the price of the stock will increase progressively before the option expires. A put on the other hand gives the option holder the right to sell an asset at a particular price within a given period. Buyers of puts option hope that the price will fall before the option reaches its expiration date.
You can choose to participate in this form of trading as one of the four main participants. The other important lingo to note is that traders who buy options (either calls or puts) are called holders while the sellers of options are called writers. Hopefully, this article has answered one of the most commonly asked questions, what is options trading.
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