Stock Trading Tips

The rudimentary knowledge of options is very essential to get into stock option trading. Go through this article and get yourself educated on the basic terminologies related to stock option trading system that can further enhance your understanding of the intricacies involved in options’ trading.

What is Stock Option Trading?

An option is just the contract representing 100 units/stocks of the underlying asset that offers the buyer the right to purchase (call option)/sell (put option) the stocks of the underlying asset.

Stock option trading is very similar to the scenario of wanting to buy a house and signing a sale agreement for the same. Suppose, you are interested in buying a house that costs $10, 00000. Though you currently don’t have the financial affordability to but that right away, you can sign a contract with the seller that gives you the right to purchase the house within a stipulated period of time, say, 2 months from the date of signing the contract. In return, you pay $3000 for this initial contract to be signed.

Irrespective of whether the construction costs are going to go up or come down, the seller has the obligation to sell the house to you at this fixed price of $10, 00000 and you possess the right to make the purchase. In this scenario, you are under no obligation to purchase the house at any cost. If you don’t make the purchase, you just loose the payment that you made towards the contract and in this case it amounts to $3000.

Here 2 different scenarios can arise. The cost of the house may go up or come down in those three months. If it goes up, say, doubles in value, you would have the tendency to make the purchase and enjoy the profit of $10, 00000 that you made in a 2-month duration. If it comes down to $8000, you might not want to buy the house and suffer a loss. In this case, you don’t exercise the purchase and just end up in loosing the initial payment of $3000 paid towards the contract and the contract here becomes void at expiry of the timeframe.

Stock Option Trading Terminologies

Options are just the derivative products that represent the underlying asset. A call option is the contract that offers the right of purchase to the buyer, commonly called as the holder in stock option trading. This type of option obligates the seller or the writer of the option to sell the underlying asset based on the request from the holder. A put option is the contract that offers the right of sale to the buyer. It obligates the seller to purchase the underlying asset based on the requisition from the holder.

Option price is often referred to as the premium and the value of the underlying asset as per the option contract is cited as the strike price. Price of the stock, strike price, timeframe till expiry and the option estimates are the factors that determine the premium of options in stock options’ trading.

Given this, you would now have an idea of the very basics involved. There are much more to be understood to completely imbibe the in and out of stock options. But, a thorough understanding of these concepts discussed above is very vital to barge into stock options’ trading. Have these in mind and get into options trading slowly and steadily with ease.