Trading Options-revealing The Secrets
We have been getting a lot of questions lately about trading options because of our new options trading service, so I wanted to use this week's article to explain the basics of trading options. There is a lot more to consider when trading options and a lot more terminology you need to know then when trading stocks so go through the option tutorial and option trading strategy. Here are the most important things you need to know about options.
An option is considered a derivative; that is, its cost depends on a root asset. These root assets may take the form of stocks, ETFs or Indexes. Purchasing an option conveys to you the opportunity, yet not the duty to buy the asset at a given cost (referred to as the strike price).
There are two types of options, Calls and Puts. The value of Call options increase as the value of its underlying asset increases. Traders buy Calls when they think the price of the asset is going to go up. The value of Put options work the opposite way, they increase as the underlying asset decreases.
When you first buy a call option the price of the underlying asset will be below the strike price of the option. This is called being out of the money. Once the price of the asset rises above the strike price then the option is in the money. This is when you are in a profitable position. The price of the option will rise accordingly and you can sell it for a profit, or exercise it for a profit. The whole process works the opposite way for put options.
Options are not issued by companies like stocks are. All options that exist are "written" or sold by another trader somewhere. So in a way, you are directly betting against that person if you buy an option. All options have an expiration month. The option will expire at the close of trading on the third Friday of that month. If you are still holding the options at that time they will expire and be worthless.
There are a number of different trading strategies which options may be used for. The most common and basic ones is simply purchasing Puts and Calls. Additional strategies are selling options, and using sets of options for calendar spreads, straddles, strangles and butterflies. There is a lot more involved with trading options, however, these are a few of the basic ones which can assist you when getting started.
Greg was hired by the Timber Hill's Foreign Currency Options Group at the Philadelphia Stock Exchange (PHLOX) in 1991. He began trading options option tutorial option trading strategy his career on the floor of the American Stock Exchange as an MI Index and Equity Options Clerk. Early in 1992, he moved to the New York Mercantile Exchange working on the Floor as a Crude Oil Options & Futures Clerk. He passed the Membership Exam with a perfect score and began trading Crude Oil in the summer of 1993.Securities, an APEX Market Marking Firm, hired Greg.
Published January 5th, 2009
Filed in Finance
