Option Trading: How To Achieve Superior Returns As A Trader
Definition Of Options Trading
Option trading is a way of entering a market with a relatively small upfront investment, but with the possibility of netting you a much bigger return on investment than if you had traded in the underlying instrument. What you are doing in option trading is purchasing the right to buy or sell the underlying security 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.
A broader look at option trading
You would have to be deeply involved in stock market trade to understand the difference between stock trading and option trading. If you as a newcomer still want to be involved in option trading you must make an effort to understand terminology used and the ideas behind the concept. The terms by used by traders in option trading are quite specific and have their own meanings. When you go in for option trading you would have to decide a price for the stock you want to trade in , the number of shares, and the time period in which you would make such a trade.
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. 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.
Generally though, because of the leverage that options provide, you can control a far larger amount of the underlying stock for a relatively small capital outlay compared with buying or selling the underlying instrument. That is what makes options so attractive because there exists the potential to make far higher return on capital than through merely trading the underlying instrument. When you know what you are doing, there are also far more trading opportunities with relatively lower risk compared to merely buying or selling the underlying.
What do the words mean?
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.
The option giving the right to sell the underlying instrument at the strike price is called the "put" option.
The price that you agree to when the option trading contract is made 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".
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. - 23204
Option trading is a way of entering a market with a relatively small upfront investment, but with the possibility of netting you a much bigger return on investment than if you had traded in the underlying instrument. What you are doing in option trading is purchasing the right to buy or sell the underlying security 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.
A broader look at option trading
You would have to be deeply involved in stock market trade to understand the difference between stock trading and option trading. If you as a newcomer still want to be involved in option trading you must make an effort to understand terminology used and the ideas behind the concept. The terms by used by traders in option trading are quite specific and have their own meanings. When you go in for option trading you would have to decide a price for the stock you want to trade in , the number of shares, and the time period in which you would make such a trade.
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. 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.
Generally though, because of the leverage that options provide, you can control a far larger amount of the underlying stock for a relatively small capital outlay compared with buying or selling the underlying instrument. That is what makes options so attractive because there exists the potential to make far higher return on capital than through merely trading the underlying instrument. When you know what you are doing, there are also far more trading opportunities with relatively lower risk compared to merely buying or selling the underlying.
What do the words mean?
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.
The option giving the right to sell the underlying instrument at the strike price is called the "put" option.
The price that you agree to when the option trading contract is made 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".
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. - 23204
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posted by X - Men @ 2:38 AM
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