Know About The Terms In Option Trading
Definition Of Options 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.
A broader look at option trading
Option trading is quite dissimilar to stock trading. Before you decide to enter this field of trading options, you must understand the concepts and terminology, because the jargon alone can be very disconcerting to a new comer. The profit and loss concepts, as well as the various factors that contribute to the price of the option, are completely different to that of the underlying security. Option trading also provides you with vastly more opportunities to profit than does the simply purchase or sale of the underlying instrument. If you know what you are doing, it is actually safer to trade the options than the underlying stock.
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.
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.
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?
Terminology
When you opt for option trading you trade 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.
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. - 23217
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.
A broader look at option trading
Option trading is quite dissimilar to stock trading. Before you decide to enter this field of trading options, you must understand the concepts and terminology, because the jargon alone can be very disconcerting to a new comer. The profit and loss concepts, as well as the various factors that contribute to the price of the option, are completely different to that of the underlying security. Option trading also provides you with vastly more opportunities to profit than does the simply purchase or sale of the underlying instrument. If you know what you are doing, it is actually safer to trade the options than the underlying stock.
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.
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.
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?
Terminology
When you opt for option trading you trade 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.
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. - 23217
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