Know About The Terms In 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.
During that time you are free to complete the purchase or sale at the price decided initially. If you do not honor the contract the premium that you pay can be lost. Time period in option trading contracts are generally about a month and are settled at dates that are fixed by the stock exchanges that could be the third Saturday of the month. Once this period is over, as an option trader you have lost all rights to make the trade and your premium remains forfeit.
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.
You do not have to exercise your rights during the specified period, but your failure to do so will cause the premium you have paid for such future rights to be forfeited. The premium is charged to you so that you can lock in the agreed price for the time period that you have contracted to honor. So during these period, if you find that the price of the stock has appreciated, you are free at any time to make the balance payment and acquire the shares at the price agreed. On the other hand if the price has gone down and you do not feel that it is worthwhile honoring the option, you can take no action and allow your contract to lapse. You would however forfeit the premium you have paid. This may look like a loss, but would be much smaller than if you had bought the shares at the prevailing price before the start of the options contract.
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. Instead, he can hold onto it with the hope that there will be rise in the option of the market value, by depending upon factors such as volatility, expiry time and much 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?
What do the words mean?
Option trading for stocks is generally in blocks of 100 shares
The option giving the right to buy the underlying instrument at the strike price is called the "call" option.
The option giving the right to sell the underlying instrument at the strike price is called the "put" option.
The price set in the option trading contract at which the underlying may be bought or sold is called the "strike price".
In option trading, for call options you are "in the money" if your strike price is below the market price of the stock. For put options, if the strike price is higher than the current market price, you are again said to be "in the money".
Out of the money: When the strike price is above the existing price of the stock and you exercise a call option, and when the strike price is below the existing price of the stock and you exercise a put option.
Article Source: FxTradingStock.com
About the Author
Discover FREE expert Trading videos, podcasts and articles packed with secret strategies to super-charge your Trading and rocket your profits. Dr. Asoka Selvarajah also offers you his critical FREE report, The 7 Deadly Mistakes Of Online Trading. Visit His Online Trading Site OnlineTradingRebel.Com Right Now!
by: Dr. Asoka Selvarajah
Total views: 102
Word Count: 717
Date: Thu, 2 Apr 2009
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