Trading Options Online Help
Learning the basics of Trading can be confusing and very difficult, with that thought in mind this Hub was born. Knowledge is power and no where is that more evident then in Trading. There is a vast sea of knowledge out there and I will try to gather some useful information for people who want to be informed and learn more about the Stock Market world in general but in this hub we will focus on an introduction to Trading Options.
In finance, an option is a contract between a buyer and a seller that gives the buyer the right—but not the obligation—to buy or to sell a particular asset (the underlying asset) at a later day at an agreed price. In return for granting the option, the seller collects a payment (thepremium) from the buyer. A call option gives the buyer the right to buy the underlying asset; aput option gives the buyer of the option the right to sell the underlying asset. If the buyer chooses to exercise this right, the seller is obliged to sell or buy the asset at the agreed price. The buyer may choose not to exercise the right and let it expire. The underlying asset can be a piece of property, or shares of stock or some other security, such as, among others, a futures contract. For example, buying a call option provides the right to buy a specified quantity of a security at a set agreed amount, known as the 'strike price' at some time on or beforeexpiration, while buying a put option provides the right to sell. Upon the option holder's choice toexercise the option, the party who sold, or wrote the option, must fulfill the terms of the contract.
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As with anything involving money, options involve risk and not everyone will be successful. Option trading can be unpredictable there is risk involved. Only invest with risk capital-money you can comfortable lose if need be.
A bond is a debt security, similar to an IOU. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency, or other entity known as the issuer. In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it "matures," or comes due. In contrast to bondholders who have IOUs from the issuer, shareholders are owners of the company they purchase.
There are many different kinds of bonds, including: U.S. government securities, municipal bonds, corporate bonds, mortgage and asset-backed securities, federal agency securities, and foreign government bonds.
Read more about Bonds here
In business and finance, a share of stock (also referred to as equity share) means a share ofownership in a corporation (company). In the plural, stocks is often used as a synonym forshares especially in the United States, but it is less commonly used that way outside of North America.
In the United Kingdom, South Africa, and Australia, stock can also refer to completely differentfinancial instruments such as government bonds or, less commonly, to all kinds of marketablesecurities.
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"Stock fund" and "equity fund" describe a type of investment company(mutual fund, closed-end fund, unit investment trust (UIT)) that invests primarily in stocks or "equities" (as contrasted with "bonds"). The types of stocks in which a stock fund will invest will depend upon the fund’s investment objectives, policies, and strategies. For example, one stock fund may invest in mostly established, "blue chip" companies that pay regular dividends. Another stock fund may invest in newer, technology companies that pay no dividends but that may have more potential for growth. Another type of stock fund—an index fund—invests in stocks of companies contained in a particular market index. (There are also index funds that invest in bond indices.)
Like any investment, stock funds are subject to various investment risks. The prices of the stocks of companies in which the funds invest may fluctuate based on changes in the companies’ financial condition and on overall market and economic conditions. This can affect the performance of a stock fund. Some stock funds attempt to minimize these risks by spreading out ("diversifying") their investments among different companies, industries, and markets. If a fund is diversified, its prospectus with tell you this.
Before investing in a stock fund, you should carefully read all of the fund’s available information, including its prospectus and most recent shareholder report.
Options are contracts giving the purchaser the right to buy or sell a security, such as stocks, at a fixed price within a specific period of time. Stock options are traded on a number of exchanges, including:
- American Stock Exchange
- Boston Stock Exchange
- Chicago Board Options Exchange
- International Securities Exchange
- Pacific Exchange
- Philadelphia Stock Exchange
Before trading in options, you should educate yourself about the various types of options, how basic options strategies work, and the risks involved. If you have a question about options, you can contact the Options Industry Council at 1-888-OPTIONS (1-888-678-4667) or visit its Learning Center web page. On the OIC website, you can also read a number of publications, including the "Characteristics and Risks of Standardized Options" booklet.
When you buy an option, the purchase price is called the premium. If you sell, the premium is the amount you receive. The premium isn't fixed and changes constantly - so the premium you pay today is likely to be higher or lower than the premium yesterday or tomorrow.
If you buy options, you start out with what's known as a net debit. That means you've spent money you might never recover if you don't sell your option at a profit or exercise it. And if you do make money on a transaction, you must subtract the cost of the premium from any income you realize to find your net profit.
As a seller, on the other hand, you begin with a net credit because you collect the premium. If the option is never exercised, you keep the money. If the option is exercised, you still get to keep the premium, but are obligated to buy or sell the underlying stock if you're assigned.
The Value of Options
What a particular options contract is worth to a buyer or seller is measured by how likely it is to meet their expectations. In the language of options, that's determined by whether or not the option is, or is likely to be, in-the-money or out-of-the-money at expiration. A call option is in-the-money if the current market value of the underlying stock is above the exercise price of the option, and out-of-the-money if the stock is below the exercise price. A put option is in-the-money if the current market value of the underlying stock is below the exercise price and out-of-the-money if it is above it. If an option is not in-the-money at expiration, the option is assumed to be worthless.
An option's premium has two parts: an intrinsic value and a time value. Intrinsic value is the amount by which the option is in-the-money. Time valueis the difference between whatever the intrinsic value is and what the premium is. The longer the amount of time for market conditions to work to your benefit, the greater the time value.
Several factors, including supply and demand in the market where the option is traded, affect the price of an option, as is the case with an individual stock. What's happening in the overall investment markets and the economy at large are two of the broad influences. The identity of the underlying instrument, how it traditionally behaves, and what it is doing at the moment are more specific ones. Its volatility is also an important factor, as investors attempt to gauge how likely it is that an option will move in-the-money.
What is a Call Option?
A call option gives its holder the right to buy 100 shares of the underlying security at the strike price, anytime prior to the options expiration date. The writer (or seller) of the option has the obligation to sell the shares.
If the strike price of a call option is less than the current market price of the underlying security, the call is said to be in-the-money because the holder of this call has the right to buy the stock at a price which is less than the price he would have to pay to buy the stock in the stock market. The converse of in-the-money is, not surprisingly, out-of-the-money. If the strike price equals the current market price, the option is said to be at-the-money.
Calls and Puts
The two types of options are calls and puts:
A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires.
A put gives the holder the right to sell an asset at a certain price within a specific period of time. Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.
Participants in the Options Market
There are four types of participants in options markets depending on the position they take:
1. Buyers of calls
2. Sellers of calls
3. Buyers of puts
4. Sellers of puts
People who buy options are called holders and those who sell options are called writers; ~buyers are said to have long positions, and sellers are said to have short positions.
Here is the important difference between sellers as well as buyers:
~Buyers =Call holders and put holders
are not obligated to buy or sell. They have the choice to exercise their rights if they choose.
~Sellers=Call writers and put writers
are obligated to buy or sell. This means that a seller may be required to make good on a promise to buy or sell.
In order to trade options, you'll have to know the terminology associated with the options market.
The price at which an underlying stock can be purchased or sold is called the strike price.
This is the price a stock price must go above (for calls) or go below (for puts) before a position can be exercised for a profit. All of this must occur before the expiration date.
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Reading An Options Table
Column 1: Strike Price - This is the stated price per share for which an underlying stock may be purchased (for a call) or sold (for a put) upon the exercise of the option contract. Option strike prices typically move by increments of $2.50 or $5 (even though in the above example it moves in $2 increments).
Column 2: Expiry Date - This shows the termination date of an option contract. Remember that U.S.-listed options expire on the third Friday of the expiry month.
Column 3: Call or Put - This column refers to whether the option is a call (C) or put (P).
Column 4: Volume - This indicates the total number of options contracts traded for the day. The total volume of all contracts is listed at the bottom of each table.
Column 5: Bid - This indicates the price someone is willing to pay for the options contract.
Column 6: Ask - This indicates the price at which someone is willing to sell an options contract.
Column 7: Open Interest - Open interest is the number of options contracts that are open; these are contracts that have neither expired nor been exercised.
US Securities and Exchange Commission
Read more at the US Securities and Exchange Commission Question and Answer section: here
- The Options Industry Council
- Free Publication Characteristics and Risks of Standardized Options
On the OIC website, you can also read a number of publications, including the "Characteristics and Risks of Standardized Options" booklet
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