Looking for a quick primer on option trading. The following article does a nice job of laying out the basics of trading options. If you’re new to the game, you should get a lot out of it.
Being the best investor requires you have knowledge of all your trading options in order to make the most informed decisions. When it comes to your investment choices you have quite a few to choose from; one which is often misunderstood but which could give you a great return on your investment if you know what you are doing is option trading. Because options trading is different to normal investing, you need to make sure that you fully understand what options are before you begin.
The potential for volatility is the biggest issue with options trading. Yet that volatility is in direct proportion to the amount of speculation an individual investor is willing to engage in. So applying the same tactics to options trading should not pose any trouble to those who usually trade in commodities for example. By the same token, speculation is not required. Investors who are not comfortable with speculative trading can be more reserved when dealing in options.
What is Meant by Options
When it comes to options, you are actually buying the right to purchase stocks or shares at a price that both you and the seller have agreed on. You are actually paying for the right to buy these stocks at a later date for the price that you have agreed on. There are a couple of reasons why a transaction like this is referred to as an option. First of all, though you have purchased the right to acquire the asset in question, you are under no obligation to do so. Second, acquiring the asset is something that will take place in the future – should you choose to exercise the option. Either way, you will pay for the contract whether or not you acquire the asset.
You might understand this a bit better if you think about buying the car of your dreams. You might agree with the seller that for the next ninety days, you have the right to buy the car for $25,000 but you have to pay the seller $5,000 to have this right. During that time you have the ability to raise the cash, do a little more investigation on the vehicle, and decide whether or not it is an appropriate investment. If you decide to go through with the deal, you give the owner the $25,000 and he surrenders the car to you. If you decide not to go through with it, the owner keeps your original $5,000 and is free to sell the vehicle to someone else.
The Various Types of Options
Not only can you trade options in two different ways, there are two different types of options that you can trade. Let’s We will first look at the ways of trading.
The two different ways of trading options are referred to as ‘puts’ and ‘calls’. A call is an option to purchase an asset for a specified price within a given time frame; a put is an option to sell an asset. There are both advantages and disadvantages to these and they are very similar. Rising prices are beneficial to those dealing in calls while falling prices are beneficial to those dealing in puts.
As for the two types of options, they’re known as American and European. An American option means you must make your decision to exercise the option within the agreed time frame. When you buy a European option, you have to wait until the time expires before you can exercise your option. Both types of options have advantages and disadvantages.
In terms of options trading, there is quite a bit more to it than what has been covered in this article. For now, it’s enough to know that options trading can be profitable if you do it correctly. You can find plenty of information online to help you get started if you would like to try your hand at options trading.
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