Being able to make the most informed decisions is very important if you want to be a good investor and this requires having the knowledge of all your trading options. One of the most misunderstood investments, but one which could yield great returns if used properly, 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.
You will find that options has its critics and these critics are usually unhappy about the fact that it is so volatile. But the amount of speculation that an investor is willing to engage in will have a direct impact on that volatility so this is worth remembering. For example, someone who is used to trading in commodities and other similar securities will have little trouble employing the same types of speculative strategies in options trading. You should also be aware that speculation is not always necessary. Investors who are not comfortable with speculative trading can be more reserved when dealing in options.
Options and What They Are
When you buy options, you are actually getting a contract which gives you the right to buy certain stocks or shares at an agreed price. This contract is purchased by you from the seller and your goal should be to exercise your right to buy at a later date. There are two reasons why this type of transaction is called an option. The first reason is that you are not under any obligation to buy the asset despite the fact that you have paid for the right to buy it. 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.
To understand this more easily think of purchasing your dream car. 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. So what you will do during the ninety days is to find the cash for the car and research the deal so that you can be sure that you want to go ahead with this investment. If you do decide that you would like to buy the car within the 90 day period then you can buy it if you pay the seller the $25,000. However, if you decide that you actually don't want to buy the car, then the $5,000 that you paid to the seller is kept by him and he can sell the car to another person.
Types of Options
As well as there being two different types of options, there are also two different ways to trade them. Let's We will first look at the ways of trading.
The two ways to trade options are known as "calls" and "puts"~The two different ways of trading options are referred to as 'puts' and 'calls'~'Calls' and 'Puts' are what the two different ways to trade options are known as. 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. It is important to realize that these are quite similar and they both have benefits and drawbacks. Rising prices are beneficial to those dealing in calls while falling prices are beneficial to those dealing in puts.
The two types of options that are available are 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. There are advantages and disadvantages to both of these options.
This article is only the tip of the iceberg in terms of options trading. However all you need to know now is that it can be done for a profit if you know what you are doing. You can find plenty of information online to help you get started if you would like to try your hand at options trading.
You will find that options has its critics and these critics are usually unhappy about the fact that it is so volatile. But the amount of speculation that an investor is willing to engage in will have a direct impact on that volatility so this is worth remembering. For example, someone who is used to trading in commodities and other similar securities will have little trouble employing the same types of speculative strategies in options trading. You should also be aware that speculation is not always necessary. Investors who are not comfortable with speculative trading can be more reserved when dealing in options.
Options and What They Are
When you buy options, you are actually getting a contract which gives you the right to buy certain stocks or shares at an agreed price. This contract is purchased by you from the seller and your goal should be to exercise your right to buy at a later date. There are two reasons why this type of transaction is called an option. The first reason is that you are not under any obligation to buy the asset despite the fact that you have paid for the right to buy it. 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.
To understand this more easily think of purchasing your dream car. 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. So what you will do during the ninety days is to find the cash for the car and research the deal so that you can be sure that you want to go ahead with this investment. If you do decide that you would like to buy the car within the 90 day period then you can buy it if you pay the seller the $25,000. However, if you decide that you actually don't want to buy the car, then the $5,000 that you paid to the seller is kept by him and he can sell the car to another person.
Types of Options
As well as there being two different types of options, there are also two different ways to trade them. Let's We will first look at the ways of trading.
The two ways to trade options are known as "calls" and "puts"~The two different ways of trading options are referred to as 'puts' and 'calls'~'Calls' and 'Puts' are what the two different ways to trade options are known as. 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. It is important to realize that these are quite similar and they both have benefits and drawbacks. Rising prices are beneficial to those dealing in calls while falling prices are beneficial to those dealing in puts.
The two types of options that are available are 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. There are advantages and disadvantages to both of these options.
This article is only the tip of the iceberg in terms of options trading. However all you need to know now is that it can be done for a profit if you know what you are doing. 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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1 comment:
The Fundamentals Of Options Trading with including various important topics like Options and What They Are, Types of option.
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