Option Trading – Know Your Rights
Posted on May 18 2008 | Tagged as: Finance
There is more potential with option trading than with any other form of investment that has ever existed. Because the up-front cost of this activity is lower than that of stock trading, one gets a high leverage means of investing that lessens one’s risks significantly and can result in a significant financial gain.
Basically, those buying options have rights while those selling options have duties. Buyers trading options have rights, but not duties, to either call (purchase) or put (sell) a stock or future at an agree price until the third Friday of the month in which it expires.
There are two opposite ways to do option trading: calls and puts. A call option is essentially the right to purchase the underlying asset at a specific price. A put options gives you the ability to sell the underlying asset at a specific price. You must understand the subtleties and challenges of both while doing stock options trading. Every strategy that you study from now on necessitates an understanding of the key features and differences between these two kinds of options.
There are actually no margin requirements if you want to buy an option because your risk is restricted to the price of the option. In contrast, option sellers obtain a credit in their account for selling an option and also get to keep this amount if the option expires worthless.
However, those selling option are required to put (buy) or call (sell) if the option they have is indeed excercised by the holder who is allocated the option. Therefore, to sell an option, one must have a significant margin. Option trading requires that one is knowledgeable about the terminology of option transactions.
A strike price is the buying or selling value of the underlying stock, if that option is exercised. Options are available in many strike prices both above and below the underlying assets current price. The strike prices will typically appear in 2 1/2 dollar intervals for a stock that is priced under $25 per share. The strike prices of stocks priced over $25 will generally appear in $5 intervals.
The date the option concludes is referred to as the expiration date. A stock option usually expires by close of business on the 3rd Friday of the expiration month. All listed options have options accessible for the current month and the next month as well as explicit future months. Each stock has an equivalent cycle of months that they recommend options in. There are generally three fixed expiration cycles available. And each cycle is supposed to have a four-month interval. MACD Indicator stands for Moving Average Convergence / Divergence, is actually a technical analysis indicator.
There is more potential with option trading than with any other form of investment. Because the up-front cost of this activity is lower than that of stock trading, one gets a high leverage means of investing that lessens one’s risks significantly and can result in a significant financial gain. You must understand the subtleties and challenges of both while doing stock options trading. Every strategy that you study from now on necessitates an understanding of the key features and differences between these two kinds of options. The technical indicator used most frequently is the MACD indicator which stands for Moving Average Convergence/Divergence.
- David Baxwell