Options Trading for Dummies – The Things You Should Know Better

If you are a starter in the market of options trading, and looking for good advice on options trading for dummies, this is what you should be reading first. Option trading is relatively less risky and more profitable than other modes of investing tools available in the market, but it still carries some risks. To avoid the risks in the options trading, and to maximize the profits, you should be very careful about some important aspects of options trading.

On initial lessons of options trading for dummies, various terms of options trading should be made clear to the options traders. Very first of them is option itself. Options are contracts that give the owner rights to buy or sell some stocks at a fixed price. The price is fixed at time of issuing the contract and if the stocks are bought or sold under the option, they are bought or sold at that price regardless of their current market price. This price is called strike price. Options have a time limit, called expiry date, after which if the option is not exercised it becomes valueless. Usually, the expiry dates of the options are marked only by month. In that case, the exact expiry date is the third Friday of that month. Also, owners of stock options are called option holders, and the sellers of options are called option writers.

Options have a price or premium of itself, which is not related to the price of the stocks. Instead, it is usually related to the market position of the stock which determines the amount of gain that is possible from that option. Usually, the price of the option as well as the strike price of the underlying stock is mentioned for one single stock only, but the options come as a bundle of 100 stocks. In that case, the actual price of the option is 100 times the price mentioned for the singular stocks.

Next thing that should be discussed in options trading for dummies is the types of options. Options can be of two types. One is call options, giving you, the option holder the right to buy the stocks; another is a put option, which gives you the right to sell some options. In case of call options, the options writers are the sellers of the stock, and in case of put options, options writers are the buyers of the stock.

One thing should be known from the beginning is that success in option trading highly depends on the option trading strategy applied by the trader. There are many simple as well as complex strategies used by expert traders. Choosing and applying correct strategy depends on your knowledge on the strategies as well as current state of the market. A good strategy can increase the profit to the maximum while reducing the risks to minimum, but largely depends on the trader’s perception of market flow and future assumptions.

So, in options trading for dummies, proper research and good knowledge of above factors is highly important. But it is not the complete solution. For starters, it is a good idea to seek help from professionals in this field. Licensed option trading farms and brokers are good choices as a starting point.

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