• Stock Options Basics

    Looking for an easy to understand tutorial on stock options basics? We’re here to help educate you on all basic facets of stock options trading. If you are in need of answers to understand and get a taste of the world of stock options basics and options trading, you might want to check out the following frequently asked questions. There is too much information to digest when you are a beginner in stock trading but this does not mean you can’t do it just because you don’t have extensive knowledge about stock trading systems.

    Generally speaking, any investment endeavor has to begin somewhere. In this case, the beginning of stock options basics is through asking questions which will help you improve your knowledge about stock trading.

    Stock Options Basics For Day & Swing Trading

    Q. What is options trading?

    A. Basically, options trading is a contract or agreement between 2 people, namely the buyer and seller. An option is bought by the buyer and the price is called the premium. The two types of options include – buying puts and calls. The put means your right to sell while the call is your right to buy. Common things to put or call include –

    •Underlying asset – Specific item
    •Strike price – Specific price
    •Until expiration – Specific time

    For example, you received a check at the supermarket during your shopping. You have used a call option which allows you to return to the store and buy the specific item at a discounted price. This rain check is only valid for a specific time and the premium is zero since you received it for free. The expiration is the last day of its validity. Stock options are not that complicated if you utilize the rain check example.

    Q. How does it work?

    A. As an option owner, you have rights to exercise certain selling and buying decisions. On the other hand as an option seller, you have obligations to provide as well. The call owner has the right to buy the underlying through paying the strike price which is actually not necessary.

    As an option owner, you can choose to follow the specifics of a contract thus you are exercising the option. Once an owner exercises the option, the option seller will no longer have control over the option. Instead, the seller will be given an exercise notice and is obligated to follow specific conditions of the contract which includes –

    •Call seller sells the shares of stock and receives the strike price for each
    •Put seller buys shares of stocks and pays the adequate strike price

    Stock Options Basics And Advanced Strategies

    Q. How to buy, sell and exercise options?

    A. The underlying asset is 100 shares of stock if you decide to use options in the stock market. If you enter a contract to buy or sell options, the broker sends the options to exchanges where the order comes from, which is exactly the same method used in buying or selling shares of stock.

    If you have decided to exercise the option, you should notify your broker and allow him to take care of the rest of the process for you.

    On the other hand if you decided to sell an option and received an exercise notice, your broker will notify you.

    Q. How to get started?

    A. You need to open a brokerage account before you start buying or selling options. Several good brokers are available in case you need one. You need to remember that not everyone can do trading options, thus it is important that you read information and educate yourself before you start trading options.

    In addition, you also have to open up a margin account since this is mandatory for options trading. If you have a margin account, you will be able to borrow money from the broker even though it is unnecessary for you to do so.

    Q. How to do trading?

    A. Option quotes should be provided by your broker once you start trading options. Alternatively, you can obtain quotes from options exchanges.

    The fair value of options can be described in mathematical terms. It is possible to get the fair value of an option through calculation. The presence of online calculators allows you to get rid of the mathematical complexities.

    You need to input information such as:

    •Strike price
    •Stock price
    •Volatility
    •Interest rate
    •Expiration date
    •Dividend

    Volatility is a term that measures the tendency of the stocks to undergo price changes. This is the simplest and most comprehensible definition of the term “volatility”. If the stocks tend to have large price changes often, they are said to be volatile and the options trade involved in them are at much higher prices than non-volatile stocks.

    There are many ways by which you can use options since they are versatile in nature. Options can either be speculative or conservative. It is recommended that you learn the conservative strategies when getting involved in trading options especially when you are a beginner.

    Conservative strategies help you to build your profits initially before you attempt other methods later on.

    Conclusion:

    It is important that you learn stock options basics before you start trading. There is much to learn in this industry thus you should invest an ample amount of time and effort to learn everything that you can in order to minimize the risks and losses. Since you are a novice trader, you should prepare knowledge-wise and be sufficiently capitalized with money which you will be using to buy and sell options. If you have a broker, you can also consult with him and ask for some tips and advice.

    Finally, if you are going to hire a broker, it is important that you find someone you can trust. After all, you are going to give out delicate information about your finances for a long period of time. We hope you enjoyed this edition dedicated to stock options basics and be sure to let us know if we can help.

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