Options Trading Facts
 

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Options Trading Facts

An often used method of trading stocks, currencies, or futures is online options trading. By trading options, a trader limits his or her risk and exercises a degree of leverage as well. Traders use both fundamental and technical analysis to gain insight into the equities that underlie the options contracts that they trade. There are a number of potentially profitable options strategies but one must learn the basics before moving on to more complicated things in options trading. With that thought in mind here are a few basic options trading facts.

Options Trading Facts I

An options contract is a financial instrument that conveys to the buyer the right to buy or sell a stock, futures contract, or currency at a set price, called the strike price. This price remains stable no matter what the market price of the underlying equity does. Thus the value of an options contract rises or falls based upon the difference between the equity price upon which the contract was based and the current price, known as the spot price. Options contracts also have what is referred to as time value. If, for example, a stock is rising and an options contract on that stock has a long time to run, the contract will commonly be more valuable as speculators believe that the options contract will become more valuable with time. When there are only few days left until expiration of an options contract, its time value becomes negligible as there is little time left for the price to rise.

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Options Trading Facts Presentation Transcript

  • 1. By www.options-trading-education.comOptions Trading Facts
  • 2. By www.options-trading-education.comAn often used method of trading stocks,currencies, or futures is online options trading.By trading options, a trader limits his or her riskand exercises a degree of leverage as well.Traders use both fundamental and technicalanalysis to gain insight into the equities thatunderlie the options contracts that they trade.
  • 3. By www.options-trading-education.comThere are a number of potentially profitableoptions strategies but one must learn the basicsbefore moving on to more complicated things inoptions trading. With that thought in mind hereare a few basic options trading facts.
  • 4. By www.options-trading-education.com• Options Trading Facts IAn options contract is a financial instrument that conveys to the buyer the right to buy or sell a stock, futures contract, or currency at a set price, called the strike price. This price remains stable no matter what the market price of the underlying equity does. Thus the value of an options contract rises or falls based upon the difference between the equity price upon which the contract was based and the current price, known as the spot price.
  • 5. By www.options-trading-education.comOptions contracts also have what is referred to as timevalue. If, for example, a stock is rising and an optionscontract on that stock has a long time to run, thecontract will commonly be more valuable as speculatorsbelieve that the options contract will become morevaluable with time. When there are only few days leftuntil expiration of an options contract, its time valuebecomes negligible as there is little time left for the priceto rise.
  • 6. By www.options-trading-education.com• Options Trading Facts IIWhereas buying an options contract gives the buyer the right to buy or sell the underlying equity it does not obligate the trader to do so. On the other hand the seller of an options contract is paid money for taking on the obligation to sell or buy the underlying equity if and when the buyer chooses.
  • 7. By www.options-trading-education.comBecause sellers set the prices of optionscontracts, options sellers tend to make moremoney over time than options buyers. However,the seller of an options contract, also called thewriter of the contract, takes on a risk.
  • 8. By www.options-trading-education.comThere are times in volatile markets when sellerscan lose substantial sums of money. Thus thebusiness of writing options contracts is largelylimited to large institutions with a high degree ofexpertise and very deep pockets.
  • 9. By www.options-trading-education.com• Options Trading Facts IIIOptions traders use calls and puts in search of profits in Forex, futures, and stock option trading. The buyer of a call contract pays money for the right to buy the underlying at the strike price, up to the expiration date of the options contract. He or she will only do so if the price of the underlying moves up.
  • 10. By www.options-trading-education.comAt that time he or she may execute the contractand buy the equity and simultaneously sell it fora profit. Alternatively, he or she may simply sellthe options contract, which is now morevaluable, and pocket the profit, never touchingthe underlying stock, futures contract, orcurrency.
  • 11. By www.options-trading-education.comIn buying a put on a stock, commodity future, orcurrency the trader pays for the right to sell theunderlying. If the price of the underlying falls heor she will do so and simultaneously purchasethe same, or simply sell the contract. These arebasic options trading facts and necessary inorder for one to begin the process of becominga successful options trader.