I Love Trading Options

In the stock market, an option is a contract that gives its purchaser a right to sell or purchase shares up to a specified date. You should note here the buyer gets the right, but is not obliged to purchase or sell stock.

Let’s explain this with an example: Let’s make the assumption that the stock of IBM is trading at $25 today, and you predict it to go up. That suggests you’re bullish on IBM, and hence you’ll buy its “buy option” up to a later stated date (say a month) at say $27 by paying a tiny premium. Now assume that traders take up IBM’s price to $40 in the month of May. At this point you can decide to book profits by selling your option contract. On the other hand, if IBM’s share price remains static or turns negative, then you can choose not to exercise your option and your maximum loss will be the premium you paid for buying the option.

When you're learning the trading jargon start by knowing there are 2 sorts of options and they are called “Calls and Puts.” A Call option gives its owner a right to get a share at a mentioned price inside a specified period. Purchasers of call options are bullish on the stock – they feel the share price will rise before the date the option contract ends. A put option gives its owner the prerogative to sell a share at a cited price within a cited period. Purchasers of put options are bearish on the stock – they expect the share price to drop before the date stated in the contract.

Thenext thing you need to understand are the players that make up the option market. You've got the buyers of the call options and the buyers of the put options. Then you have got the sellers of the call options and the sellers of the put options. Then you have got the people who buy option contracts and they are named as “holders”, while folks who sell them are called “writers”.

In option trading there's a very important difference between buyers and sellers of options – It is not compulsory for a customer of a choice contract to buy or sell, nonetheless it is compulsory for the seller of an option contract to make good his side of the contract.

When you're ready to start you really should know some of the commonly utilised terminology. For instance the phrase “Strike Price” means the price at which a share option can be acquired or sold. Then you have the “expiration date” which is the last date of the option contract’s validity – after this date it ceases to be.

Another term to grasp is “in-the-money,” a call option contract may be said to be in-the-money when the stock price goes higher than the strike price, while a Put option is in-the-money when a share’s price goes below the strike cost. Eventually there is the “premium” which is the cost of an option.

Allen Sama of Option Genius trades options for a job. If you'd like to discover how, visit OptionGenius.com

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