More and more people discover options contracts every year, and
it's really no wonder why. You can get a potentially larger
return on options than on stocks, because options allow you to
execute a greater sized trade with less current capital. This
leverage can be your best friend or your worst enemy, depending
on how the options trade works out. Option contracts have four
standardized terms which we'll examine now:
This is the basic structure of every options contract, so this
is where your learning begins. We'll examine each one, in
limited detail:
1) Expiration Month -The expiration month is the easiest to
understand. Options are not like stocks, they have specific
expiration dates, specified in months. Options won't go on
forever. They will either expire worthless or be exercised and
this occurs by a certain date. In this sense, you're betting on
the future when you dabble in options.
2) Type of Option - is it a call or a put? A call is the right
to buy 100 shares of a certain stock by a certain date. If you
think XYZ corp will be $100 in June and it's $80 right now, you
will purchase a call today that guarantees you the right to buy
the shares at $80. If you think XYZ is overvalued, and you
believe it will go down in price by a certain date, then you
will purchase a put. A put is the right to sell 100 shares of a
stock at a certain price on a certain day.
3) The underlying security - You can't get around the fact that
purchasing options essentially makes you an investor in a
company's stock. You may plan on selling before the expiration
date, but there's a risk you won't be able to, so you have to be
aware of all the factors that make investing in the company a
good or a bad decision. Options markets are more illiquid than
the stock market, so factor that risk in when making your
purchasing decision.
4) The striking price - This is the price at which the stock can
be purchased. The striking price remains the same for as long as
you hold the contract, despite the price of the actual shares of
the company. If you finish above the striking price, then you're
"in the money". You can exercise the option, sell the 100 shares
at a higher price and buy them at a lower price simultaneously.
You pocket the difference immediatedly, and this profit is what
is so intriguing to options investors.
The best bet when it comes to investing in options is to invest
in a company where you actually want to own the underlying
stock. This way, you're prepared to hold the investment through
its' maturity, if you have to. Savvy investors usually use
"straddles" with options to help offset risk of their large
holdings. There's also a growing class of options traders who
trade them because of the potentially huge returns they offer.
Many traders trade index futures daily based on very short term
trends. Options trading is growing enormously. It's easier than
ever to trade options in your brokerage account, and more stocks
have options associated with them than ever before. Good luck to
you on your endeavor into this highly lucrative global field.
About the author:
For more information about
Trading
Options, please visit
http://www.superiorinvestor.net
