ArticlesBase.com - Free Articles Directory
Free Online Articles Directory
08.10.2008 Sign In Register Hello Guest
Email:
Password:
Remember Me 
forgot your password?


Some Fundamentals of Option Trading

Author: Casey Yew Author Ranking Blue | Posted: 16-01-2007 | Comments: 0 | Views: 128 | Rating:  (50) Article Popularity - Green (?) Got a Question? Ask.
Sign Up Now!

Option trading is an ever increasingly popular form of investment. The wide spread use of online option trading has led to many newcomers to these risky, but potentially profitable opportunities. The following is a review of some of the fundamentals of Option Trading.

The Future

Options trading is sometimes known as "future trading". In the commodity market, for example, options are commonly called futures. This points up one of the basic fundamentals of the market. You are making an investment now, based on what you think will happen in the future. Furthermore, you are making a contract to perform an act such as buying or selling at a future date. When you make an options contract to buy stock, remember, you are not buying, or paying for the stock, you are merely buying and paying for the contract to buy or sell it at a later date.

An Option is a Choice

The name option comes from the concept that your contract is buying the RIGHT, but not the OBLIGATION, to buy or sell stock at a future date. You pay for that right, but you can exercise your option or choice, by deciding not to buy or sell the stock before the future date arrives. This future date is known as the expiration date, and it means just that. Your choice expires on that date, and you have to exercise it then if you have not done so before it arrives.

What Goes Up Can Also Come Down

There are two kinds of options contracts. One is to buy stock, called a call, and the other is to sell stock, called a put. In each case, you are making a decision and picking a certain price. This price is known as the strike price. Your decision is basically this. In a call contract, you are expecting that the price will rise higher than the strike price by the expiration date. If you are right, you get to buy the stock at a price less than it is really valued at, and this difference is your profit.

In a put contract, you are expecting that the stock will drop in price more than the strike price by the expiration date. If you are right again, you get to sell it for a price higher than it is really worth, and again the difference represents your profit. The stock can go either way and the thing to remember here is that you make a call contract, or a put contract based on which way you expect it to go.

Options are not Death or Taxes

Death and Taxes are reputed to be the only "sure things", and options certainly have no argument with that. There is risk here and uncertainty. The stock you think is going to go up, may go way down. You then have made a contract to buy the stock at a price a lot higher than the actual price.

Imagine you make a contract with Wal-Mart to buy a new pair of jeans for $20 dollars, and give them five dollars to reserve the right to do so in two months. When the two months is up, Wal-Mart is running a sale on your jeans for only $10 dollars a pair. You paid $5 for the right to buy them at double the price. This example illustrates the risk, but also the advantage of options. You are not obligated to buy the jeans, and can refuse to exercise the option. In this case, you lose the $5 dollars, of course, but still can buy the jeans at $10, which even when you add in the lost $5 still is less than $20.

There is still risk, but having an option can reduce it somewhat. Just make sure you understand that they are not a "get rich quick sure fire scam", but a legitimate investment opportunity that shares the common features of all investment opportunities. This can be expressed as "The greater the risk, the greater the potential for profit."

These are just some of the fundamentals of option trading. It is a very diverse and interesting field, but the facts are out there, and you are not required to be a stock broker or financial professional to take advantage of this market. It is open to all.

Rate this Article: Current: 0 / 5 stars - 0 vote(s).

Article Source: http://www.articlesbase.com/finance-articles/some-fundamentals-of-option-trading-92642.html

Print this Article Print article   Email to a Friend Send to friend   Publish this Article on your Website Publish this Article   Send Author Feedback Author feedback  
About the Author:

Among the Many Investment Opportunities that Exist, Option Trading Stands as Both One of the Most Exciting and Risky as well as One that Offers Some of the Best Chances for a Substantial Return. Learn Options Trading Basics, Strategies and Pricing here at http://www.option-trading-fortune.com

Submitting articles has become one of the most popular means of generating quality backlinks and targeted traffic to your website. Join us today - It's Free!

Article Comments

Comment on this article Comment on this article
Your Name
Your Email:
Comment Body
Enter Validation Code: Captcha


Got a Question? Ask.

Ask the community a question about this article:

Q&A Powered by:
Powered by Yedda 

Latest Finance Articles

BVI Offshore Registration: All That You Need To Know To Get Started
By: Ramapati Singhania | 08/10/2008
BVI offshore registration is certainly cheaper than Lichtenstein or Luxembourg and extremely popular. More than 6,500 companies are incorporated in this jusrisdiction every month!

The History of the Global Forex Market
By: Orlando Thompson | 07/10/2008
In this article we explain what the global forex market is and how it came to be this is very insightful information that will help you in your forex trading system choices.

How To Go About Improving Your Credit Score
By: MIKE SELVON | 07/10/2008
While it'd be nice to live a "credit-free existence," it can be difficult to do so in today's world.

Self Directed IRA Possibilities With A Small Business
By: Jerry Glynn | 07/10/2008
It is normally not possible to set up a self directed IRA with a small business. This article describes a little known strategy that can be used in conjunction with a small business.

Understanding Debt Consolidation Loans
By: Richard Greenwood | 07/10/2008
It can be all too easy to end up in debt and especially during the current times of financial uncertainty you may find yourself unable to make repayments. Consolidating your debt can make your debts easier to manage and lower your interest charges meaning you become debt free faster.

Credit Card Comparison
By: Richard Greenwood | 07/10/2008
Credit card offers are everywhere and all claim to out do each other. How do you cut through the marketing talk and understand the key features you need to compare to make an informed decision. Find out with this informative article on credit card comparison.

Shopping For Auto Insurance
By: Brenda Williams | 07/10/2008
When you get your license for the first time before you begin driving you need to get car insurance as it's mandatory to have car insurance while driving. Car insurance can be rather expensive, especially for new drivers which is why you'll need to ensure that you're getting the best...

Taking 100% Responsibility - the Prerequisite for Creating Money & Marriage Success
By: Leslie Cunningham | 07/10/2008
It's a simple concept, to refrain from blaming and complaining, and yet it's a challenge to change a habit, especially one that everyone else has. Like sticking to your diet, when everyone else around you is enjoying chocolate cake. Keep reading and you'll find out how this relates to your marriage and finances. Then I'll share some action steps to help you become 100% responsible for your life.

More from Casey Yew

Future Option Trading - A Brief History and Overview
By: Casey Yew | 15/01/2007 | Finance
Future Option Trading is similar to the Stock Options Trading in many ways, but there are also some major differences. Some of the terminology used in Futures Trading also has a different meaning than the same term when applied to Stock Option Trading, and caution must be used to avoid confusion.

What is Unemployment Insurance
By: Casey Yew | 10/01/2007 | Non-Fiction
Unemployment insurance is a national insurance program that was instituted in the later years of the Great Depression to help in the stabilization of the economy. The program was retained to help to cover fluctuations in both local and national economy.

A Sample Option Trading Strategy
By: Casey Yew | 09/01/2007 | Finance
When you feel you understand a bit about the Options Trading Market, and are ready to give it a try, you need to spend a bit of time developing a strategy to guide your investment decision. It is important in doing this to understand the basic difference between a strategic decision and a tactical decision.

Choose The Travel Insurance That is Right For You
By: Casey Yew | 18/12/2006 | Non-Fiction
It is something that we all need if we are planning to take a trip overseas. Travel insurance will cover most costs in the event of a delayed or canceled trip, death or illness and lost baggage.

Term Life Insurance Gives You the Exact Coverage You Need
By: Casey Yew | 17/12/2006 | Non-Fiction
Term life insurance covers you for a pre-planned period of time when the coverage is needed most. It allows you the flexibility to insure your family while they are at home and to cancel or diminish the policy when it is less necessary for the continued happiness and welfare of your family.

Get a Good Real Estate Investment Return
By: Casey Yew | 16/12/2006 | Investing
If you are considering getting into property investment, one of the most important things you can do is to learn what exactly makes a good property investment return. Your return is actually what money you will make on the investment or your profit. In order to maximize your property investment return, there are several things you should do.

Choose The Right Insurance For Your Boat
By: Casey Yew | 15/12/2006 | Non-Fiction
A good boating insurance policy covers liability, collision, and damage by vandalism. The coverage itself will vary with the type of watercraft that you own and operate, but all of the policies are intended to help you get underway without fear.

Tips For Your Real Estate Finance and Investment Strategy
By: Casey Yew | 15/12/2006 | Investing
You may have decided you would like to start investing in property but you are not exactly sure how to go about it. One thing you should do before you begin is to research the financing options that may be available to you. Most people, when they first begin their endeavor with property investing, find that financing is their only means of purchasing property.

Article Categories






Give Feedback

Sign up for our email newsletter

Receive updates, enter your email below