PostHeaderIcon Option Trading Basics

InvestmentTrading in options is another way that a stock trader can be more flexible in terms of going through different deals in the market. Options are financial instruments that give the trader the right but is not obliged to engage in a future transaction. Unlike a forward or a future, options give the trader the flexibility of not exercising the right if he so decides not to.

There are basically two types of options contracts that traders can deal with. Buying a call option gives the trader the right to buy a specified number of stock shares at a set price within a specified time period. Buying a put option give the trader the right to sell. When the holder of an options contract decides to exercise his right as stipulated in the contract, the party that sold or offered the option is obligated to fulfill the terms of the contract.

Call options

Call options usually increase in value as the underlying stock also increases in its value. A put option on the other hand increases in value when the underlying stock decreases in value. By buying both a call and put option on a certain stock, a trader enjoys a certain flexibility in his investments.

An increase in stock prices will allow his call option to increase in value while the put option value increases when the stock value goes down. Having a combined position will allow the trader to enjoy increases in stock value when the market goes in either direction. The trader may only lose money when the stock price remains stagnant or within a certain range when the position was started.

Option trading

Option trading has a number of advantages over other financial instruments. By dealing with option contracts, traders may have the flexibility and the means to place bets on specific areas of the market that they foresee would become big in the near future.

Option contracts also offer traders a large amount of leverage. In most countries, a single option contract can represent a certain number of multiple shares. With an option contract, a trader may get hold of a hundred to a thousand shares for just a small amount of money, giving him control over a considerably large stock position.

Option trading may be in no way more profitable than other financial instruments there are available. Trading in option contracts may also have its own share of risks that can either let the trader profit considerably in a short amount of time or even lose a considerable amount by being too careless. It is important that traders should try to study and understand better the ins and outs of options trading before putting their whole bet into it.

Bear in mind that it is only one of the many financial instruments that traders may invest in to gain and profit from. Knowing and understanding how option trading works can make traders add more investing options in his arsenal and possibly profit from the right deals made at the right time.


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