Basic for Trade Options

elcome! to the options trading section

Options trading is not easy however provides significant potential for profit, and people have been trading options for many many years. In this section, I want to provide information to help you decide whether options trading is for you and then to assist you with trading options.

Many people either actively trade options or are very interested in including them in their trading due to the significant advantages they offer over trading stocks alone.

You might not think that options trading is for individual traders, however it is. The principles that give professional options traders their edge are available to you as well. They are universal in nature. With practice you can learn to apply them yourself to help put the odds more squarely in your favour.

Introduction

Options are financial instruments that can provide you with the flexibility you need in almost any investment situation you might encounter. Options give you options by giving you the ability to tailor your position to your own situation.

• You can protect stock holdings from a decline in market price
• You can increase income against current stock holdings
• You can prepare to buy stock at a lower price
• You can position yourself for a big market move - even when you don't know which way prices will move
• You can benefit from a stock price's rise or fall without incurring the cost of buying the stock outright
  

The following information provides the basic terms and descriptions that any investor should know as they learn about stock options.

Describing Stock Options

A stock options is a contract which conveys to its holder the right, but not the obligation, to buy (in the case of a call ) or sell (in the case of a put ) shares of the underlying security at a specified price (the strike price) on or before a given date (expiration day). After this given date, the options ceases to exist. The seller of an options is, in turn, obligated to sell (in the case of a call) or buy (in the case of a put) the shares to (or from) the buyer of the options at the specified price upon the buyer's request.

Stock options contracts usually represent 100 shares of the underlying stock.

Strike prices are the stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the options holder upon exercise of the options contract. The strike price, a fixed specification of an options contract, should not be confused with the premium , the price at which the contract trades, which fluctuates daily.

Stock options strike prices are listed in increments of 1, 2 ½, 5, or 10 points, depending on their price level. Adjustments to a stock options contract's size and/or strike price may be made to account for stock splits or mergers. Generally, at any given time a particular stock options can be bought with one of four expiration dates.

Stock options holders do not enjoy the rights due stockholders - e.g., voting rights, regular cash or special dividends, etc. A call holder must exercise the options and take ownership of underlying shares to be eligible for these rights. Buyers and sellers in the exchange markets, where all trading is conducted in the competitive manner of an auction market, set options prices.

Calls and Puts

The two types of stock options are Calls and Puts.

A call options gives its holder the right to buy 100 shares of the underlying security at the strike price, anytime prior to the options expiration date. The writer (or seller) of the options has the obligation to sell the shares.

The opposite of a call options is a put options, which gives its holder the right to sell 100 shares of the underlying security at the strike price, anytime prior to the options expiration date. The writer (or seller) of the options has the obligation to buy the shares.

The Options Premium

An options's price is called the premium . The potential loss for the holder of an options is limited to the initial premium paid for the contract. The writer on the other hand has unlimited potential loss that is somewhat offset by the initial premium received for the contract.

Investors can use put and call options contracts to take a position in a market using limited capital. The initial investment would be limited to the price of the premium.

Investors can also use put and call options contracts to actively hedge against market risk. A put may be purchased as insurance to protect a stock holding against an unfavorable market move while the investor still maintains stock ownership.

A call options on an individual stock issue may be sold, providing a limited degree of downside protection in exchange for limited upside potential. Our Strategies Section shows various options positions an investor can take and explains how options can work in different market scenarios.

Underlying Security

The security - such as XYZ Corporation - an options writer must deliver (in the case of call) or purchase (in the case of a put) upon assignment of an exercise notice by an options contract holder.

Expiration Friday

The Expiration day for stock options is the Saturday following the third Friday of the month. Therefore, the third Friday of the month is the last trading day for all expiring stock options.

This day is called Expiration Friday . If the third Friday of the month is an exchange holiday, the last trading day is the Thursday immediately proceeding this exchange holiday.

After the option's expiration date, the contract will cease to exist. At that point the owner of the options who does not exercise the contract has no "right" and the seller has no "obligations" as previously conveyed by the contract.