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Understand Stock Options Basics Before You Start Trading Options

By Edited Feb 5, 2016 0 0

Stock Options Basics

Trading stock options is one of the most lucrative ways of making money on the Internet. Now, just like most things that are worth their while, understanding the basics is most of the time good enough. Understanding stock options basics is no different. A real understanding of the basics of stock options is very important if you are to succeed trading it. You will discover four of these basics in this article.

Point #1: Contract: The stock options contract is usually agreed between two parties, the seller and the buyer. The buyer negotiates with the seller to purchase the item that is being sold at an agreed price, technically called the strike price. Now the buyer reserves the right do one of two things with the item being sold: he can sell it or buy at the strike price regardless of what happens with the price value of the item. This is what allows people to profit from trading stocks in rising or falling markets. The contract basically locks you in at a price. So if the value of the item increases, you still purchase the underlying instrument at the locked in price, giving you a handsome amount of profit. There are other concepts like stock option valuation. However, this is beyond the scope and purpose of this article.

Point #2: Date of Expiry: Whenever a contract is established, there is always a date by which the option must be exercised or the the contract becomes completely worthless. This expiration date is inherently affected by the stock markets' closing days of business, which is usually Fridays. For most stock options, the expiration date is usually the third Friday of the expiration month specified on the contract. Now let's move on to the next stock options basics point, which is...

Point #3: Premium: The premium is the amount of money the buyer would pay the seller of product being sold, so that he (the seller) would hold the item for the 'would be buyer' for the length of the contract, say 3 months or more; it depends on the active parties. Now whether the would be buyer goes ahead and buys the item before the contract expires or not, the seller gets to keep the premium. Also the premium is not included should the item be finally sold for the agreed price.

Point #4: Value Of Options: The value of stock options, is highly dependent on the underlying instrument that is being traded. The underlying option items that can be traded are stocks, stock indexes, foreign currencies and commodities, among others. Therefore the contract that is agreed on would have its value inherently determined by what item is being traded.

Trading options is very profitable if you understand the basics. You can even employ trading software tools such as stock option trading software to even enhance your profit potential.

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