Options Trading For The Dumbest Of Them All
View PDF | Print View
by: Trader_1
Total views: 36
Word Count: 524
So what is a stock option? Well, an option is just a contract that states that within a set time period, you will have the option of buying the stock shares at a specified price - the price being determined by the contract. There are several ways the buyer runs a risk in options trading. First off, there is a cost to buying the contract (the option). For the reward of getting a guaranteed price for the stock you might want to buy later, you must pay a price. Certainly, your contract is an option, you don't have to purchase that stock at the set price, but if you don't, you will give up the money you put down on the option purchase.
The additional peril that you as the purchaser accept in options trading, is concerning the price of the stock you bought the option on. If you buy an option on stock at a certain price, and the price rises, you could make a lot, since you bought it for less than you can sell it for. You should make a nice profit on the deal. But if the price falls, you can either buy the stock for the contract price and pay much more for it than it is worth, or you can choose not to carry out the option, and give up the money you spent acquiring the option. (You can also resell the option, but it will lose value as the expiry date nears)
In any options contract there are two sides - the buyer and the seller of the options. If you are the buyer, you don't have to purchase the stock you have an option on - that's why they are called options. If it seems like a good idea to buy the stock when the expiration date draws close, you can. The seller, nonetheless, has no choice, the seller has to sell the stock shares if the buyer wants to buy them. The seller has already accepted the amount the buyer put down on the deal in order to guarantee the share price, and now the seller must sell, even if it means he or she could possibly have sold it to another trader for a much higher price.
Options come in two basic varieties - call options and put options:
A call option gives the holder the right to buy shares at a certain price within a specific time period. Calls are like owning a long position on a stock. Purchasers of calls hope that the stock will rise considerably before the option expires.
A put option gives the holder the right to sell shares at a certain price within a specific time period. Puts are like having a short position on a stock. Purchasers of puts hope that the price of the stock will drop before the option expires.
Options trading is not for absolute beginners, but an experienced mentor can help you make the most of this choice of trading. Options trading for the dumbest of them all can be successful with a great mentor and a superior system of trading stock options.
About the Author
Andy Doering has been successfully trading options for some time now. More information and articles can be found at his Options trading site: http://bestsystemstrading.com and at http://www.bestsystemstrading.com/optionsbasics1.html
Rating: Not yet rated