Options give another dimension to a trader to speculate on the market. If properly used, can be a very beneficial tool.
The first thing to know about is what your options are. An option gives the buyer the right to take an action at a certain value at a certain price within a certain period of time. These “rights” homogenised and trade on exchanges, similar to the way stocks do.
Definitions – Some basic terms
The assurance that the buyer has the right to take a decision on the underlying is called. If you buy an option, you are long. If you sell an option, you are short. There are two sides to every option, the buyer and seller. The seller is obliged to comply with the buyer’s right. Each side has reached an agreement with the other. Therefore, we refer to an option and an option contract. You can buy and sell multiple contracts simultaneously, in the same way that you can buy and sell multiple shares of a stock. The price options contracts are exchanged in is called a premium. The underlying price, the buyer of the option has the right to buy or sell which is called the exercise price. The date when the contract runs out is called expiration date. There are two types of options:
You can see the reward of a long call and put below. The value of the option will be negative until the underlying is equal to the exercise price. Then moving upwards in value. A call moves up in value as the underlying to rise in price movements, because you have the right to buy. A put option moves up in value as the underlying moves down in price, because you have the right to sell. Both the loss of options is limited to the premium paid. Both have an unlimited amount of potential earnings.
Leverage – What is Leverage
As a rule, an option on a share represents a hundred shares of the underlying stock. This is true for most of the options that are traded on exchanges. If a stock is trading at $ 50 per share and an option to purchase at a price of $ 50 is a premium $ 1. That option will cost $ 100. Let’s say the stock goes to $ 55 per share and the subscription option rises to $ 4, and sell. You have made a profit $ 300. Options are leveraged values.
“The rules of the game is to control a large amount of a value (stocks, bonds, commodities, etc ..) with a small amount of principal. Its benefits are amplified, but remember your losses will be too.”
An Option Trade – Putting it all together
The image below is an example of an options order entry screen
The underlying ETF is the SPDR S & P 500 will try to buy calls with a maturity date of August 21 the strike price is 211. I will buy to open, which means I’m starting a position. If I was currently the option of short and wanted to close my position, I would buy to close. Conversely, if I want to initiate a short position, I would sell to open. If I want to close a long position, I will sell to close. I’ll try to buy five contracts.
The order types available are the same as for stocks. I’ll do my limit order 3,12, as there is a wonder, or asking price of 3,12 at this time. This means that no more than pay a premium of 3.12 for each option contract. Asking 3.12 indicates that sellers are lower are in 3.12. Therefore, it is likely, but not guaranteed, that my order will be executed. If I want, I can place my order limit below 3.12. However, the price would have to drop by my command to be executed. A market order will be executed at the price the market is when the agent receives its trade. A stop order and stop limit orders are protective orders that are placed above the market for buying and below the market for Sells. A regular stop order becomes a market order when the price reaches the option you set. A stop limit becomes a limit order when the option reaches the price you set.
You can also order an order of day or GTC, the same way you can with an order of values. I’ll make this end an order of day, which means that expire at the end of the day. A GTC is good until canceled. This means that the order remains active until I say specifically to cancel. A GTC order can be active for several days.
All or none, means that the order will be executed once or at all. If I choose this, I will buy five contracts my price or my order will not run at all. Since I selected “None”, that could get to have my order partially executed. For example, the agent may end up buying only two contracts. Then the agent will try to buy the other three contracts my limit price.
Those are the basics of options trading. Be sure to visit our website OptionStrategies.info or your account Twitter to keep up-to-date, to learn more about options trading and develop some ideas of operation.