Stock options are financial instruments that have provided traders all over the world tremendous opportunity to profit from speculative investment. Certainly, with the right training and preparation, traders will find true opportunity for profit and protection through stock options. This is because stock options provide two attractive benefits to traders. For one, they can be used to manage risk and hedge against risky investments. Additionally, options offer a great way to simply make income by intelligently and responsibly making trades in the market. Stock option training requires strategy and analysis because, ultimately, success is a function of making the right prediction.
Let’s discuss what stock options are. Options, in general, are contracts enacted by two parties regarding an underlying asset. With stock options, this underlying asset is a collection of stock. The option agreement is one that dictates the position of stock. To explain this further, consider an example call option.
The buyer purchases the option, which grants him or her the legal privilege but not the obligation to exercise. When the option is exercised, the buyer purchases the underlying asset (all of the stock) at a price known as the strike price. The strike price is predetermined and agreed upon at the time of purchase. If the real value of the asset is cheaper than the strike price, the seller of the option is at advantage.
Alternatively, if the real asset value increases so that it exceeds the strike price, exercising the option is a fine opportunity for the buyer. This is because it allows the buyer to obtain the underlying asset at the discounted strike price. If the buyer wishes, the asset can be purchased and then sold immediately on the open market. This would of course provide a profit. If they want a more convenient route, though, the option can be traded in the market, resulting in the same profit overall.
There are some restrictions on stock options though, most namely the expiration date. You can exercise any option you have purchased so long as you do it prior to the expiration date. Like the strike price, this is also determined at the time of exchange. The premium is also a factor. The premium is the fee paid for the option. It is the only risked capital the buyer puts forth and is essentially the investment’s principal.
Related Pages
Leave a Reply