Options Trading
Trading in options, simply put, is about placing contracts for an underlying instument (for example stocks, currency, commodities etc.) at a fixed price and a fixed date in the future. Options are so called because the buyer can exercise his/her option to either carry out the transaction or not.
There are two types of option contract:
- Call Option: Gives the buyer the right, but not the obligation,
to buy the underlying instrument (stock, currency, commodity etc.)
for a specified price on a certain date. A Call becomes more valuable
as the price of the underlying instrument appreciates relative to the
strike price (the price at which the instrument will be exchanged).
- Put Option: Gives the buyer the right, but not the obligation, to sell the underlying instrument. (stock, currency, commodity etc.) for a specified price on a certain date. A Put becomes more valuable as the price of the underlying instrument depreciates relative to the strike price (the price at which the instrument will be exchanged).
Let's take a look at a couple of simple examples to illustrate how these option contracts work:
Call Options
"A" buys a Call option contract from "B" stating that "A" will buy 100 shares of Widget Inc. from "B" on the 25th June (the Expiry or Maturity date - the deadline for the option contract) for $10 each.
If the Widget Inc. shares are trading at more than $10 on the date of expiry (25th June), "A" will exercise the option and buy the shares from "B" for $10 each and make an instant profit by selling them on the open market for the higher current share price. So if the Widget Inc. shares are trading at say $12 on the date of expiration, "A" will make 100 x $2 per share when they are sold - a profit of $200 on the contract, less a fee (called the Option Premium) "A" paid "B" when the contract was set up.
If on the other hand the Widget Inc. shares were trading at only $8 on the expiry date, then "A" would choose not to exercise the right to buy the shares and would let the options contract expire because the shares would be cheaper to buy on the open market. The only loss on the contract would be the Option Premium "A" paid to "B". The option premium would be "B's" profit from the contract.
Put Options
"A" buys a Put option contract from "B" which states that "A" will sell 100 shares of Widget Inc. to "B" on the 25th June for $10 each.
If the Widget Inc. shares are trading less than $10 on the date of expiry (25th June), "A" will exercise the option and sell the shares to "B" for $10 each. "A's" profit will come from buying Widget Inc. shares on the open market for the lower share price and sell them to "B". So if the Widget Inc. shares are trading at say $8 on the date of expiration, "A" will make 100 x $2 a share when they are sold to "B" - a profit of $200 on the contract less the Option Premium.
If the Widget Inc. shares were trading at $12 on the expiry date, then "A" would choose not to exercise the right to sell the shares and would let the options contract expire because the shares can be sold for more money on the open market. The only loss on the contract for "A" paid to "B" the Option Premium paid to "B".
With Options trading you can make you very large returns in small amount of time, but it can also be a very risky venture for the inexperienced. Understanding the mechanics of Option Trading is step in the right direction, but that isn't enough on which to start trading. The true essence of Options Trading is being able to spot profitable trades and having an effective strategy to take advantage of them - for this you need a solid education in the subject and the right tools to do the job. The following resources are designed to provide you with just that:
For Information On Options Trading Courses And Resources Click On The Links Below:
Options Trading Courses
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With this Home Study Course from Options University you get just the concise instruction you need to master options trading as you are taken step-by-step through options trading basics through to more advanced strategies for safer investing and explosive profits... |
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Non Directional Options Trading Home Study Course This is an interactive DVD course designed to teach you an Easy-To-Understand System of options trading. The essence of trading is Risk Management, not trying to "predict" where the market is going. That's what top traders do - Manage risk. This course will teach you how... |
Option Trading Services
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Options University Gold Membership To gain an advantage in today's volatile markets requires you have the right tools to assist you in making your option trading decisions. Here's where you can gain the advantage with powerful new trade-finding tools, proprietary options trading software, scanners, and other professional-level trading technology as well as weekly video and live webinar training… |
Option Trading Software
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Technology is amazing. What you can do with the right technology quickens the pace by which you can analyze the profitability and volatility of an option. With amazing technology like Volcone Analyzer 3.0 you can punch in a couple of critical numbers and instantly tell if the option is worth your consideration... |