Option trading 101
Basically, option trading is a contract that allows you to buy and sell investments like stocks, ETF funds and other assets. The contacts include some pre-negotiated prices and expiry dates that specify how long the prices will be valid. Instead of security purchase, options contracts will give you the opportunity to sell or buy shares with other investors. Trading is simple, you are not required to do anything and you could let the contracts expire without having any obligations on them.
Buying and selling the stock options
To buy and sell in an options contract, you need a premium. The premium is a considerably small amount of money that will allow you the choice to purchase or sell some shares at a fixed price. Option trading is very similar to purchasing stock. The only difference is , you are not buying or selling the share but paying a premium for the ability to buy and sell in the future. you can sell or buy call and put options depending on your value prediction. For instance, call options are profitable to people who are expecting assets to increase in value.
Exercising the options
Traders mainly make their money through the buying and selling options. You do not have any choice to act on the terms of your contract. The good thing about option trading is that it has multiple strategies. You have the right to exercise the options as a part of the investment plan.
Why should you use options
The reputation of options is that it is not as risky as other investments but most people will leave that statement to their experiences. Options are very useful when it comes to individual investors. Having options can also have an impact on your strategic advantages. Options not only give you potential for high returns but they also act as a hedge against some losses. They require minima financial commitments. In options you do not pay to buy the shares but rather pay less for a chance to buy them at a later date.
How you can start option trading
Starting option trading is quiet simple. All you need to do is sign up with a convenient broker. You can do that by comparing the different rates and account minimums then picking the right investor that matches your lifestyle. Once you have signed up with a broker, you need to develop some strategies to use in option trading.
Beginner strategies in option trading
Some people hold call options when they expect the prices to increase. The value of your shares can increase drastically, even beyond the pre negotiates price. the strike price becomes lower than the market price which give you potential to make more money.
If you feel like the rates will fall, you need to sell your options. Buying options will limit the investment loss. All you have to do is put the options to sell at the strike price, which is higher than the market price.
This is directly opposite to the long put. It is very useful when you think the price will remain constant or rise after the expiration. These three are just the basic strategies used by beginners in option trading.