The concept of Stock option trading was introduced in the 1970’s, and it became popular in 1980’s. However the market losses of 1990 caused a stop in this type of trading, the recent concept of electronic trading (online trading) made them again popular to the public.
Stock options are options, which use stocks as the fundamental instrument. Like all types, the stock options can be defined using several related phrases that are unique to options trading markets. Strike Price, also known as Exercise Price, is a common word used to describe stock options.
Strike Price is the fixed price at which the owner of an option can buy (‘call option’) or sell (‘put option’) the underlying commodity. A call option and a put option is the right to purchase and sell 100 shares of a particular stock respectively.
It is not allowed to own puts or calls indefinitely. The expiration time ranges from one month to three years, and many points in time in between. These periods depend on which stock they represent.
There are a lot of risks coming with the stock options trading. One major risk is that the customer is obligated to trade in the strike price. That is, if a customer wants to buy the underlying stocks, he or she must do it on the strike price though the actual market stock price is lesser than that. Likewise, the customer needs to sell his stock at the strike price though the actual stock market price is far higher.
This article is written for Orient Financial Brokers (OFB), licensed and regulated by Central Bank of the UAE since 1997, to conduct brokerage in Foreign Exchange, Commodities, etc.
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