Learning options trading can be a gargantuan task for some only because they immediately look at the big picture. To become well-versed isn’t an overnight process and you should learn options trading just like many others before you did – one little chunk of information at a time.
The Basics
The contract between the holder (buyer) and writer (seller) is called an option. This contract gives the buyer the right (but not the obligation) to purchase or sell the underlying asset (usually a stock or an index), at a predetermined price (strike price), within a fixed period of time (before the expiration date).
As consideration for the option, the buyer pays a premium to the seller, this is technically to pay the seller for the risk that he has to take on the acceptance of this legal obligation that is being imposed on him. In a way, both the buyer and seller are making a bet on the market conditions (they are betting against each other).
Learn options trading by Knowing the Main Types of Options
There are two main types namely the put and call options. Put options are when the seller gives the buyer the right to sell an underlying asset before the expiration date of the option. This is done at the strike price. Call options, on the other hand, are when the seller gives the buyer the right to purchase the underlying asset before the expiration date, and at the strike price. Stock options are shares of certain companies.
All options have a given expiration date, this is the specific time when they can no longer be exercised. There is, however, a difference between the so-called American-style options and European-style options. With the former, the option can be exercised anytime from the beginning of the contract to the expiration date. The latter, however, can only be exercised on the expiration date.
These are the most basic principles that an investor needs to comprehend to learn options trading. Aside from these basics, it is also essential to learn the pros and cons of the different option types. And to effectively come up with trading strategies that work, one must incorporate this knowledge with his risk-management skills.
If you incorporate the right options trading strategy, you may even free yourself from your 9-5 job and pretty much do what you want with your time. But there isn’t any short cut when it comes to becoming another success story. You can only make good monthly income if you learn options trading the right way.
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