Fundamentals Of Options Trading - $Tock Market

[Praveenz]

Options Basics: What Are Options?

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties.

The price at which an underlying stock can be purchased or sold is called the strike price. This is the price a stock price must go above (for calls) or go below (for puts) before a position can be exercised for a profit. All of this must occur before the expiration date.

 

Calls & Puts

The two types of options are calls and puts:

Ø  A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires.

Ø  A put gives the holder the right to sell an asset at a certain price within a specific period of time. Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.

 

Example 1

Let’s say you think Allstate (NYSE:ALL), which is trading at roughly $30 a share, will rise to $35 within the next few months, but you don’t want to tie up thousands of dollars of your hard-earned cash. By instead purchasing one options contract (which controls 100 shares) at $1.50 per contract, only $150 would be tied up, as opposed to the $3,000 required if you bought 100 shares of the stock outright.

Example 2

Suppose the stock of XYZ Company is trading at $40. A call option contract with a strike price of $40 expiring in a month's time is being priced at $2.

You strongly believe that XYZ stock will rise sharply in the coming weeks after their earnings report. So you paid $200 to purchase a single $40 XYZ call option covering 100 shares. Say you were spot on and the price of XYZ stock rallies to $50 after the company reported strong earnings and raised its earnings guidance for the next quarter. With this sharp rise in the underlying stock price, your call buying strategy will net you a profit of $800.

 

Source: Investopedia

[perugu_vada]

Informative post

[MeetFriendz]

gp

[Vinuu]

very GP..........did you work with hedge fund client

[anandam2012]

naaku okka mukka ardam kaaledu

[Praveenz]

very GP..........did you work with hedge fund client

 

Thanks! No but I am high activity daily options trader. How abt you ?

[Vinuu]

Thanks! No but I am high activity daily options trader. How abt you ?

I worked with a hedge fund client

[Praveenz]

I worked with a hedge fund client

 

Thats good vinuu garu....is that client located in NY ? Do you trade stocks and options ?

[perugu_vada]

Entha perigedhi predict cheyatam chala kashtam ga
Prediction wrong aithe will loose everything ga

[Praveenz]

Entha perigedhi predict cheyatam chala kashtam ga
Prediction wrong aithe will loose everything ga

 

Ante depends on how you analyze a particular stock annamata...Technicals, Fundamentals, News etc....

 

Yes if you go wrong, motham lose avtham...But you still have a chance to book loss, to avoid losing full investment....

 

Stock nvvu bet chesina way to velthe swargam kanipistundi...

[Praveenz]

Understanding Options

Options are financial instruments that can be used effectively under almost every market condition and for almost every investment goal. Among a few of the many ways, options can help you:

·         Protect your investments against a decline in market prices

·         Increase your income on current or new investments

·         Buy an equity at a lower price

·         Benefit from an equity price’s rise or fall without owning the equity or selling it outright.

 

Benefits of Trading Options:

 

Orderly, Efficient and Liquid Markets

Standardized option contracts allow for orderly, efficient and liquid option markets.

 

Flexibility

Options are an extremely versatile investment tool. Because of their unique risk/reward structure, options can be used in many combinations with other option contracts and/or other financial instruments to seek profits or protection.

 

Leverage

An equity option allows investors to fix the price for a specific period of time at which an investor can purchase or sell 100 shares of an equity for a premium (price), which is only a percentage of what one would pay to own the equity outright. This allows option investors to leverage their investment power while increasing their potential reward from an equity’s price movements.

 

Limited Risk for Buyer

Unlike other investments where the risks may have no boundaries, options trading offers a defined risk to buyers. An option buyer absolutely cannot lose more than the price of the option, the premium. Because the right to buy or sell the underlying security at a specific price expires on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the option contract are not met by the expiration date. An uncovered option seller (sometimes referred to as the uncovered writer of an option), on the other hand, may face unlimited risk.

This options trading guide provides an overview of characteristics of equity options and how these investments work in the following segments:

Read more: http://www.nasdaq.com/investing/options-guide/#ixzz377wIsfE4