Before learning the basics of options trading and strategies, it is important to understand the rates, costs, and risks before opening an options account for trading. This article will focus on stock options vs. Foreign currencies, bonds, or other securities with which you can trade options. This piece will focus primarily on the buying side of the market and the trading strategies used.
What is a stock option?
An option is the right to buy or sell a share at the strike price. Each share contract will have one month to expire, a strike price, and a premium, which is the cost of buying or selling the option. If the contract is not exercised before the option expires, you will lose the money invested in your trading account for that contract. It is important to know that these instruments are riskier than owning the shares themselves, because unlike real shares, options have a time limit. There are 2 types of contracts. Calls and Puts and how to trade them and the basics behind them.
What is a call option and how to trade them?
A call option contract 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 actual market price of the stock. An example of a purchase option contract would be:
1 PKT Dec 40 Call with a premium of $ 500. PKT is the stock you are buying the contract on. 1 means An option contract representing 100 shares of PKT. The basic idea and learning of how to trade call options in this example is that you are paying $ 500, that you are 100% at risk if you do nothing with the contract before December, but you have the right to buy 100 shares at 40 So, if PKT shoots up to 60. You can exercise the contract and buy 100 shares at 40. If you immediately sell the shares on the open market, you will make a profit of 20 points or $ 2000. You paid a premium of $ 500, so the profit Total net in this option trading example would be $ 1500. So the bottom line is that you always want the market to go up when you are long or have bought a call option.
Business strategy vs. Exercise and understanding of premiums
With call options, the premium will increase as the market for the underlying shares rises. Buyer demand will increase. This increase in premiums allows the investor to trade the option on the market for a profit. Therefore, you are not exercising the contract, but redeeming it. The difference between the premium you paid and the premium you sold for will be your profit. The benefit for people looking to learn how to trade options or learn the basics of a trading strategy is that it is not necessary to buy a stock outright to benefit from its increase with calls.
What are put options?
A put option is the reverse of a purchase contract. Puts allow the contract owner to SELL a share at the strike price. You are bearish in stocks or perhaps in the sector in which the company is located. Since selling a stock short is extremely risky as you have to hedge that short position and the buyback price for that stock is unknown. Bet THAT wrong and you will be in a world of trouble. However, put options leave the risk to the cost of the option itself – the premium. Learning or getting information on how to trade Puts starts with the above and looks at an example of a sales contract. Using the same contract as the previous one, our anticipation of the market is completely different.
1 PKT of December 40 Put with a premium of $ 500. If the stock goes down, the trader has the right to sell the share at 40, regardless of how low the market goes. You are bearish when you buy or have long put options. Learning to trade or understand put options starts with the direction of the market and what you have paid for the option. Any basic strategy you adopt on this contract should be ready by December. Options normally expire at the end of the month.
You have the same 3 trading strategy options.
Let the option expire: usually because the market has gone up and it is not worth trading them, nor is it worth exercising your right to sell them at the strike price.
Exercise the contract: The market declined, so you buy the shares at the lowest price and exercise the contract to sell them at 40 and make a profit.
Trade the option: the market declined, which raised the premium or the market increased and you are only looking to exit before losing all of your premium.
Conclusion basics
Options trading carries good leverage because you don’t have to buy or short the stock itself, which requires more capital.
They carry a risk of 100% of the invested premiums.
There is an expiration period to take action after purchasing options.
Trading options should be done slowly and with stocks that you are familiar with.
I hope you have learned some of the basics of options, side buying, investing, and how to trade them. Look for more of our articles. American investment training.
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