The world of investment securities features many different financial instruments for the new investor. Treasurys such as T-bills and bonds are a common instrument, as are stocks issued by corporations that trade publicly. Treasurys are distinguished from stocks, though, because the former offer a guaranteed rate of return on investment while stocks offer no guarantees of return or profit whatsoever. Smart stock investors, however, can employ a number of strategies to lessen their risk, including different methods for engaging in stock options trading.
Basically, stock options give you a right to sell or purchase securities at preset prices within a certain amount of time, though you have no obligation to do so. Buyers of call option contracts gain the right to purchase a predetermined amount of shares or other securities, called underlying assets, at an agreed-upon price, which is called the security's strike price. When you buy a call option contract from the trader writing it you'll have up until the contract's expiration date, or its expiry, to make your purchase. It's important when engaging in stock options trading to obtain a favorable strike price on options contracts because your potential profit will be greater when you do.
Basic stock options trading revolves around the call option and the put option contract. A put option gives its purchaser the right to sell an underlying asset at an agreed-upon strike price. The opposite of the call option, a put option brings with it the possibility that the underlying security's sale price will be higher than what its predetermined purchase price will be by the time the put option reaches its expiration date. If you choose not to exercise your call or put option contract by its expiry you lose all rights and obligations to buy or sell that stock. However, all you've really lost when you don't exercise your call or put rights in option contracts are the prices paid for those options, which tend to be relatively low.
When it comes to stock options trading, call options convey a right to buy the securities in those contracts at prices you believe will be lower than what their prices will be at contract expiry. Typically, call or put option contracts are priced in blocks, such as 100 shares per contract. A 100-share call option contract, for instance, might be priced at $50, with the fee paid to the writer being .50 per share or a total of $50 (.50x100 = $50) to gain a right to purchase each share at a preset price by contract expiration.
Here's a basic example of a stock option transaction: you purchase a 100-share call option for $50 at $10 per share, expecting the stock's price to increase to $15 per share by contract expiry. At the end of your option contract's term the stock has risen to $15 per share and you pay $1,000 to buy the stock ($10x100 = $1,000) while quickly selling it for $1,500 ($15x100 = $1,500) and a 50% profit. Before you engage in any sort of stock options trading, though, understand thoroughly just how to exercise the rights inherent in call as well as put option contracts. Really, though, all a call or put option contract is, is just one more way to buy a stock at a low price and then sell it at a higher price.
Trading in stock options is more complicated than simply buying a stock at one price and subsequently selling it at a higher price. A major benefit to stock options trading, though, is that it can limit your "downside" or potential loss while increasing your upside potential or profit. After all, you're under no obligation to buy or sell the securities contained within a stock option contract. All you might lose in a call or put option contract is the premium you pay to the option writer to gain a right to buy or sell those shares.
Rookie options traders tend to make one common mistake when first starting out, and it lies in the fact that some take too many risks before they really understand stock options trading. Investors just getting into options trading should make an effort to thoroughly understand what an uncovered or "naked" option is, for example, because ending up holding too many of them can be financially ruinous. Options traders may find themselves in what are called "naked positions," which result when those traders end up writing contracts for options when they don't actually own any of the stocks or securities being sold or bought by their purchasers.
Writing an option contract giving a purchaser the right to buy or sell stock you don't really own in that contract is risky business, though it can be lucrative. Most brokerage houses, though, don't allow new or inexperienced investors to place naked or uncovered option contract orders. New investors entering the stock options trading world should take small, easily handled steps such as basic call or put option contracts, which can also be highly profitable, before they dive into the deep end of the options pool, so to speak. In reality, before you even engage in the business of trading in stock options you should first spend time learning from far more experienced traders willing to share the ins-and-out of stock options.
Basically, stock options give you a right to sell or purchase securities at preset prices within a certain amount of time, though you have no obligation to do so. Buyers of call option contracts gain the right to purchase a predetermined amount of shares or other securities, called underlying assets, at an agreed-upon price, which is called the security's strike price. When you buy a call option contract from the trader writing it you'll have up until the contract's expiration date, or its expiry, to make your purchase. It's important when engaging in stock options trading to obtain a favorable strike price on options contracts because your potential profit will be greater when you do.
Basic stock options trading revolves around the call option and the put option contract. A put option gives its purchaser the right to sell an underlying asset at an agreed-upon strike price. The opposite of the call option, a put option brings with it the possibility that the underlying security's sale price will be higher than what its predetermined purchase price will be by the time the put option reaches its expiration date. If you choose not to exercise your call or put option contract by its expiry you lose all rights and obligations to buy or sell that stock. However, all you've really lost when you don't exercise your call or put rights in option contracts are the prices paid for those options, which tend to be relatively low.
When it comes to stock options trading, call options convey a right to buy the securities in those contracts at prices you believe will be lower than what their prices will be at contract expiry. Typically, call or put option contracts are priced in blocks, such as 100 shares per contract. A 100-share call option contract, for instance, might be priced at $50, with the fee paid to the writer being .50 per share or a total of $50 (.50x100 = $50) to gain a right to purchase each share at a preset price by contract expiration.
Here's a basic example of a stock option transaction: you purchase a 100-share call option for $50 at $10 per share, expecting the stock's price to increase to $15 per share by contract expiry. At the end of your option contract's term the stock has risen to $15 per share and you pay $1,000 to buy the stock ($10x100 = $1,000) while quickly selling it for $1,500 ($15x100 = $1,500) and a 50% profit. Before you engage in any sort of stock options trading, though, understand thoroughly just how to exercise the rights inherent in call as well as put option contracts. Really, though, all a call or put option contract is, is just one more way to buy a stock at a low price and then sell it at a higher price.
Trading in stock options is more complicated than simply buying a stock at one price and subsequently selling it at a higher price. A major benefit to stock options trading, though, is that it can limit your "downside" or potential loss while increasing your upside potential or profit. After all, you're under no obligation to buy or sell the securities contained within a stock option contract. All you might lose in a call or put option contract is the premium you pay to the option writer to gain a right to buy or sell those shares.
Rookie options traders tend to make one common mistake when first starting out, and it lies in the fact that some take too many risks before they really understand stock options trading. Investors just getting into options trading should make an effort to thoroughly understand what an uncovered or "naked" option is, for example, because ending up holding too many of them can be financially ruinous. Options traders may find themselves in what are called "naked positions," which result when those traders end up writing contracts for options when they don't actually own any of the stocks or securities being sold or bought by their purchasers.
Writing an option contract giving a purchaser the right to buy or sell stock you don't really own in that contract is risky business, though it can be lucrative. Most brokerage houses, though, don't allow new or inexperienced investors to place naked or uncovered option contract orders. New investors entering the stock options trading world should take small, easily handled steps such as basic call or put option contracts, which can also be highly profitable, before they dive into the deep end of the options pool, so to speak. In reality, before you even engage in the business of trading in stock options you should first spend time learning from far more experienced traders willing to share the ins-and-out of stock options.
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Before you even think about taking out a stock option make sure you stop by Option Millionaires at stock options trading for the best in option trading tutorials and training.
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