Before learning the basics about trading options and strategies, it is important to understand the types, costs, and risks before opening an option account for trading. This article will focus on stock options versus foreign currencies, bonds or other securities on which you can trade options. This article will focus primarily on the buying side of the market and the trading strategies used.
What's an option to buy?
An option is the right to buy or sell a stock at the exercise price. Each share contract will have one expiration month, one strike price and one bonus – which is the purchase or short cost of the option. If the contract is not exercised prior to the expiration of the option, you will lose your money invested in your trading account of this contract. It is important to know that these instruments are riskier than owning the stocks themselves, because unlike real stocks, options have a time limit. There are 2 types of contracts. Calls and bets and how to exchange them and the bases behind them.
What is an option to buy and how to redeem them?
A purchase option agreement gives the holder the right to buy 100 shares of the stock (per contract) at the fixed exercise price, which does not change, regardless of the price real market of the action. An example of a call option contract would be:
1 PKT Dec 40 Call with a premium of $ 500. PKT is the stock on which you buy the contract. 1 means An option contract representing 100 PKT shares. In this example, you have to pay $ 500, which represents a 100% risk if you do nothing with the contract until December, but you have the right to buy 100 shares at 40. So, if PKT pulls up You can exercise the contract and buy 100 shares at 40. If you sell the stock immediately on the open market, you will make a profit of 20 points or $ 2,000. You will have paid a premium of $ 500, so the total net gain in this example of trading options would be $ 1,500. In summary, you still want the market to go up when you're buying or have bought a purchase option.
Trading strategy vs. Exercise and understand bonuses
With the purchase options, the premium will increase as the underlying stock market increases. Buyer demand will increase. This increase in premiums allows the investor to negotiate the option in the market against a profit. So you do not exercise the contract, but you negotiate it. The difference between the premium you paid and the premium for which it was sold will be your profit. The advantage for people who wish to learn to negotiate options or to become familiar with the basics of a trading strategy is that it is not necessary to buy an action to profit from it.
What are the put options?
A put option is the reverse of a purchase contract. Contracts allow the holder of the contract to SELL a stock at the strike price. You are bearish on the stocks or perhaps the sector in which the company is located. Since selling a short stock is extremely risky, you must cover it and your redemption price for that stock is unknown. Bet wrong and you are in a world of problems. However, put options leave the risk on the cost of the option itself – the premium. Learning or getting information on how to trade Puts starts with the above and examines an example of a sales contract. Using the same contract as above, our market anticipation is completely different.
1 PKT Dec. 40 With a premium of 500 USD. If the stock falls, the trader has the right to sell it at 40%, regardless of the decline in the market. You are bearish when you buy or have long sell options. Learning to negotiate helps you understand or better understand what you have paid for the option. Any basic strategy you take on this contract must be made by December. Options normally expire at the end of the month.
You have the same 3 choices of trading strategy.
Let Option expire – usually because the market has grown and it's not worth negotiating, or exercise your right to sell it at the strike price.
Contract Exercise – The market has dropped. So you have to buy the stock at the lowest price, then exercise it to sell it at 40 and make a profit.
Negotiating the option – The market has gone down, which has increased the premium or the market has gone up and you are only looking to get out before losing your entire premium.
Trading options have an interesting leverage effect because you do not have to buy or sell your shares, which requires more capital.
They carry a risk of 100% on the premiums invested.
There is an expiration period to take action after the purchase of options.
The trading options must be slow and with actions you know well.
I hope you learned the basics of trading options, investing and trading options. Look for more of our articles. American Investment Training.