There are many different types of investment securities or vehicles available to the hopeful investor. The two most-common investment vehicles are Treasurys, such as T-bills or Treasury bonds, and stocks offered by publicly traded companies. A distinguishing feature of Treasurys is that they offer a guaranteed return on investment in the form of a promised interest rate while stocks themselves offer absolutely no guarantee as to ROI. Investors in stocks, though, can make use of various strategies to hedge or lessen their risk of loss, including stock options trading.
In essence, a stock option gives you the right, but no obligation, to purchase or sell a security at an agreed-upon price within a certain time frame. Call options give to their buyers rights to purchase a set number of shares of stock or other securities, called underlying assets, at a preset price, which is more commonly known as its strike price. Purchase of a call option from the trader writing that contract gives you up until the contract's expiry or expiration date to exercise your purchase of the contract's underlying assets. Obtaining a low strike price on any options contract will help increase your profit should you decide to exercise your rights under the contract.
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.
Call options in stock options trading give a right to purchase a security at a price you expect to be lower than what the price would be at the contract's expiration date. Generally, call and put options come bundled in 100-share blocks. To use an example, a 100-share call option might be available from a trader or contract writer at $50, with the premium or fee for each share in the contract being .50 (.50x100 = $50), thus giving the purchaser the right to buy each share at its strike price before the contract expires.
For example, let's say you purchase a 100-share call option for $50, giving you the right to purchase each share for $10 and the stock's price rises to $15 by contract expiration date. You now have the right to exercise your purchase option for $1,000 ($10x100 = $1,000) and can quickly sell your 100 shares for $1,500 ($15x$1,000), or a $500 or 50% profit. Before undertaking any sort of stock options trading, you need to know how to intelligently exercise your call or put option rights. All a call or put option contract is, at heart, is a variation of the "buy low, sell high" strategy inherent in all stock investing.
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.
One mistake rookie options traders make sometime is taking too many risks before they understand the ins-and-outs of the stock options trading world. New options traders should take sufficient time to familiarize themselves with what "naked" or uncovered options are, for instance, because getting caught holding too many of them can quickly lead to financial ruin. Naked or uncovered options create naked positions for traders and they occur when those traders write option contracts without actually owning any of the stock or security being bought or sold.
When you write a contract for an option to sell or buy a stock or other financial instrument, when you don't actually own any of that stock, comes with a great deal of risk. Most brokerages won't actually allow new or rookie traders to even engage in naked or uncovered options trading, though when such options are manipulated smartly great profit can result. For a new trader thinking about getting into stock options trading in a big way, it's much smarter to start out taking small steps and gain experience engaging in calls and puts on option contracts, which can also be highly lucrative. If you're going to get into trading in options, you're well advised to first seek advice and even training from highly experienced traders willing to teach you the ropes before trading on your own, quite honestly.
In essence, a stock option gives you the right, but no obligation, to purchase or sell a security at an agreed-upon price within a certain time frame. Call options give to their buyers rights to purchase a set number of shares of stock or other securities, called underlying assets, at a preset price, which is more commonly known as its strike price. Purchase of a call option from the trader writing that contract gives you up until the contract's expiry or expiration date to exercise your purchase of the contract's underlying assets. Obtaining a low strike price on any options contract will help increase your profit should you decide to exercise your rights under the contract.
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.
Call options in stock options trading give a right to purchase a security at a price you expect to be lower than what the price would be at the contract's expiration date. Generally, call and put options come bundled in 100-share blocks. To use an example, a 100-share call option might be available from a trader or contract writer at $50, with the premium or fee for each share in the contract being .50 (.50x100 = $50), thus giving the purchaser the right to buy each share at its strike price before the contract expires.
For example, let's say you purchase a 100-share call option for $50, giving you the right to purchase each share for $10 and the stock's price rises to $15 by contract expiration date. You now have the right to exercise your purchase option for $1,000 ($10x100 = $1,000) and can quickly sell your 100 shares for $1,500 ($15x$1,000), or a $500 or 50% profit. Before undertaking any sort of stock options trading, you need to know how to intelligently exercise your call or put option rights. All a call or put option contract is, at heart, is a variation of the "buy low, sell high" strategy inherent in all stock investing.
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.
One mistake rookie options traders make sometime is taking too many risks before they understand the ins-and-outs of the stock options trading world. New options traders should take sufficient time to familiarize themselves with what "naked" or uncovered options are, for instance, because getting caught holding too many of them can quickly lead to financial ruin. Naked or uncovered options create naked positions for traders and they occur when those traders write option contracts without actually owning any of the stock or security being bought or sold.
When you write a contract for an option to sell or buy a stock or other financial instrument, when you don't actually own any of that stock, comes with a great deal of risk. Most brokerages won't actually allow new or rookie traders to even engage in naked or uncovered options trading, though when such options are manipulated smartly great profit can result. For a new trader thinking about getting into stock options trading in a big way, it's much smarter to start out taking small steps and gain experience engaging in calls and puts on option contracts, which can also be highly lucrative. If you're going to get into trading in options, you're well advised to first seek advice and even training from highly experienced traders willing to teach you the ropes before trading on your own, quite honestly.
About the Author:
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 options trading advice and training.. This article, The Basics Of Call Option And Put Option Contracts In Stock Options Trading has free reprint rights.
0 comments:
Post a Comment
Don't use active link, spamming, phising or making chaos