Option Trading Gives You Better Returns
What is option trading?
Option trading is a way of entering a market with a relatively small upfront investment, but with the possibility of netting you a much bigger return on investment than if you had traded in the underlying instrument. What you are doing in option trading is purchasing the right to buy or sell the underlying security within a specified time period.
Generally these option periods last a month and a specific day of the month is decided for termination of the contract. This is the third Saturday of the month or any other day specified by the exchanges who monitor such trades. The expiry of the period expunges all the rights of the option trader and he cannot make the trade after the date is over.
A broader look at option trading
You would have to be deeply involved in stock market trade to understand the difference between stock trading and option trading. If you as a newcomer still want to be involved in option trading you must make an effort to understand terminology used and the ideas behind the concept. The terms by used by traders in option trading are quite specific and have their own meanings. When you go in for option trading you would have to decide a price for the stock you want to trade in , the number of shares, and the time period in which you would make such a trade.
You do not have to exercise your rights during the specified period, but your failure to do so will cause the premium you have paid for such future rights to be forfeited. The premium is charged to you so that you can lock in the agreed price for the time period that you have contracted to honor. So during these period, if you find that the price of the stock has appreciated, you are free at any time to make the balance payment and acquire the shares at the price agreed. On the other hand if the price has gone down and you do not feel that it is worthwhile honoring the option, you can take no action and allow your contract to lapse. You would however forfeit the premium you have paid. This may look like a loss, but would be much smaller than if you had bought the shares at the prevailing price before the start of the options contract.
The stock price may drop or just remain lower the exercise price, the buyer of call option cannot use at all, but can also sell the option and in that way exit the position at a loss or breakeven. Alternatively, he can hold onto it with the expectation that the market value of the option will rise, dependent upon factors such as the underlying stock price, volatility, time to expiry and more.
Generally though, because of the leverage that options provide, you can control a far larger amount of the underlying stock for a relatively small capital outlay compared with buying or selling the underlying instrument. That is what makes options so attractive because there exists the potential to make far higher return on capital than through merely trading the underlying instrument. When you know what you are doing, there are also far more trading opportunities with relatively lower risk compared to merely buying or selling the underlying.
Terms in usage
Blocks of 100 shares are considered for option trading.
Call option: The option giving the right to buy the underlying instrument at the strike price.
The selling option the underlying instrument at the strike price is referred to as a put option.
The price that you agree to when the option trading contract is made is called the strike price.
In option trading, for call options you are "in the money" if your strike price is below the market price of the stock. For put options, if the strike price is higher than the current market price, you are again said to be "in the money".
You are considered to be "out of the money" if your strike price is more than the existing price at the time of the option and you put in a call option, or you put in a put option and the strike price is lower than the existing price. - 23210
Option trading is a way of entering a market with a relatively small upfront investment, but with the possibility of netting you a much bigger return on investment than if you had traded in the underlying instrument. What you are doing in option trading is purchasing the right to buy or sell the underlying security within a specified time period.
Generally these option periods last a month and a specific day of the month is decided for termination of the contract. This is the third Saturday of the month or any other day specified by the exchanges who monitor such trades. The expiry of the period expunges all the rights of the option trader and he cannot make the trade after the date is over.
A broader look at option trading
You would have to be deeply involved in stock market trade to understand the difference between stock trading and option trading. If you as a newcomer still want to be involved in option trading you must make an effort to understand terminology used and the ideas behind the concept. The terms by used by traders in option trading are quite specific and have their own meanings. When you go in for option trading you would have to decide a price for the stock you want to trade in , the number of shares, and the time period in which you would make such a trade.
You do not have to exercise your rights during the specified period, but your failure to do so will cause the premium you have paid for such future rights to be forfeited. The premium is charged to you so that you can lock in the agreed price for the time period that you have contracted to honor. So during these period, if you find that the price of the stock has appreciated, you are free at any time to make the balance payment and acquire the shares at the price agreed. On the other hand if the price has gone down and you do not feel that it is worthwhile honoring the option, you can take no action and allow your contract to lapse. You would however forfeit the premium you have paid. This may look like a loss, but would be much smaller than if you had bought the shares at the prevailing price before the start of the options contract.
The stock price may drop or just remain lower the exercise price, the buyer of call option cannot use at all, but can also sell the option and in that way exit the position at a loss or breakeven. Alternatively, he can hold onto it with the expectation that the market value of the option will rise, dependent upon factors such as the underlying stock price, volatility, time to expiry and more.
Generally though, because of the leverage that options provide, you can control a far larger amount of the underlying stock for a relatively small capital outlay compared with buying or selling the underlying instrument. That is what makes options so attractive because there exists the potential to make far higher return on capital than through merely trading the underlying instrument. When you know what you are doing, there are also far more trading opportunities with relatively lower risk compared to merely buying or selling the underlying.
Terms in usage
Blocks of 100 shares are considered for option trading.
Call option: The option giving the right to buy the underlying instrument at the strike price.
The selling option the underlying instrument at the strike price is referred to as a put option.
The price that you agree to when the option trading contract is made is called the strike price.
In option trading, for call options you are "in the money" if your strike price is below the market price of the stock. For put options, if the strike price is higher than the current market price, you are again said to be "in the money".
You are considered to be "out of the money" if your strike price is more than the existing price at the time of the option and you put in a call option, or you put in a put option and the strike price is lower than the existing price. - 23210
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