MAGAZINE – OPTION TRADER MAGAZINE (OPTIONSTRADERMAG.COM)

What are the options?

Options are exactly what they say they are. There is a right to buy or sell shares of a stock.

Any trade requires two parties. Someone needs to sell the shares and someone needs to buy them.

Selling is sometimes referred to as writing. The company associated with the underlying stock is not involved in the transaction. When one party purchases the option to either buy or sell stock shares at an agreed upon price by a certain date, trade options occur.

Put option and call option.

There is a choice on the buyer and obligation on the seller with a call option. Someone could buy the right to purchase shares in Company A for $22 each for the next two months. If the buyer exercises his or her option, the seller is obligated to sell those shares at that price.

A put option is when someone buys the right to sell shares. The buyer is obligated to buy at the contract price if that person exercises the option to sell.

Why do you buy options?

People who think they have a better understanding of the market enter options. There is a chance that the share price will increase before the option expires, so the buyer locks in the current price. The seller agrees to this option because he or she believes the stock will remain consistent or devalue before the option expires.

There are options strategies.

Strategies that expose the trader to less risk can be combined with options. There are some common trading strategies. A vertical spread is a trader option to buy or sell stock based on the same security at a different price. If the stock trades for $10 and the trader has 100 shares, he can sell them for $10. He may be able to buy shares from someone else for $8. He has made a profit if both options go through.

Beginners should become educated before getting involved with options. There is a high risk associated with options trading, especially for someone who doesn’t understand what they are doing, because trades can be constructed where there is a very good chance of profit.

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