Stock Option Trading The Basics

When it comes to stock option trading. new investors should be cautious of attempting to trade in the options market. After all, this is a powerful investment tool that can cause losses very quickly. So if you plan to stay long in the stock market business, you have to gain knowledge by understand the mechanics of options -especially how an option position could affect a stock position or even become a stock position.

Understanding and using options is based on the ability to draw profit and loss diagrams of strategies on the expiration date. It is imperative that you you the profit and loss diagram of option strategies since by doing so you are almost 90% of the way of understanding options. When an expiration profit and loss diagram of the strategy is completed, it revealsmany things such as break-even ponts, maximum risk. and proft potential. Investors also need to know what stock position is createdif the option is in-the-money at expiration. An in-the-money long call at expiration, for example, is assumed to be exercised and thus become a long stock position.

These stock options are actually very important in the market because they provide advanced investors with extra opportunities that could pave way to better returns in doing business within the stock market. Investors usually make use of these rights to evade from price declines, to give insurance for the price of a future purchase, or even to help them speculate future stock prices .

There are two kinds of options call options and put options. Call options basically give purchasers the privilege to buy underlying stocks. while put options allow the purchaser to sell the underlying stocks.

What Are the Objectives of Using Options?

- Buy good Stocks at good prices

- Sell Stocks at good prices

- Lower the cost basis of stock purchased

- Insure stocks against a market decline

- Insure liuid investments against missing a market rally

- Reduce the break-even point on a losing position without increasing the risk

How Do You Exercise Options?

If you already own an option, you can exercise buying or selling its stock any time on or before its expiration date. This would allow you to trade the stock at a set price regardless of what the current market price is for that particular stock.

And thus, you can have the privilege of buying or selling stocks in cases wherein you fear that prices might get too high or too low for you. In this way, you have certain degree of insurance on the investments that you make. A lot of investors simply make trades without any intent of possessing the underlying securities.

In trading options. also take not that the pricing may be extremely complicated. But it will basically depend on two major factors the pricing of the underlying stocks and the amount of time remaining within the contract.

The price for principal stocks that accompany the options directly affects the price of the option. If the demand for the stocks is high, the price for the options will also go up and vice versa.

The amount of time left within the contract for an option also determines the price. As time expires, the price for the option may go down as it may become less desirable.

Take note that in the trading options game, investors use various trading strategies. which may all be very risky and complicated. And so, to become really successful in your attempts to profit from option trading. make sure that you at least familiarize yourself with the different strategies and consult experts who can give you good and reliable training.

Stock option trading can be a very strong investment tool for anyone who does business in the stock market. However, keep in mind that for someone who is not as familiar with the different strategies and if you are new to the stock exchange, this may be a very risky endeavor to take on. And so, utmost caution for beginners is highly advised.

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