Stock Option Trading : Play Your Cards Right
When it comes to stock option trading, you will find that there are four types of such options available to you. These are: -
1. Buyers of calls,
2. Sellers of calls,
3. Buyers of puts, and 4. Sellers of puts. To understand the above points you need to know, that the stock option trading and stock option market, have their specific language sets. Before you indulge into stock option trading, it is quite essential for you to understand the different technologies used in the process. Concepts underlying the alien stock option trading terminologies are often quite simple, and you will be comfortable in trading, when you are able to grasp the true meaning of these terminologies. "Call" is a contract that provides you with an option to purchase a block of stocks at a specified price by a specified date line. Remember that there is no obligation for the buyer. It is simply an option and you may or may not buy the stock in trade. "Put" is just the opposite version of the "call". Here you enter into a contract to sell a block of stocks at a specified price by a scheduled date line. Once again the option lies with you and you may or may not sell the stock. Use of the two types, "calls" and "puts", are different. Calls are good for speculative trading, while puts are useful for hedging. Both the forms are influenced by the strike price of the assets that are put to trade on the date of expiry. The buyers and the sellers are also known by the "holders", and the "writers" respectively. Buyers of calls occupy a long position compared to the buyers of puts, who occupy a short position. "Holders" means the person or persons who buy the contract. Since they have the option to make decision whether to buy contracts or not, the option trading market mostly refers to this set of traders as "Holders". Similarly, "Writers" are the complements of the holders. To conduct a transaction you require a minimum of two parties, a buyer and a seller. Writers are the sellers of contracts. But they do not exercise the options. Options basically lie with the holders who can either buy or decide not to buy the contract. On the other hand, the writers have an obligation when the holder decides to buy their contract. In stock option trading, a "long position" refers to the fact that you are holding certain block of stock in order to obtain better profits since you anticipate a rise in the value of the stock. On the other hand "short position" means that you are holding back the stock in anticipation of a fall in its value. The "underlying asset" is the actual stock or security that is put to option contract. The value of the contract solely depends on the value of the underlying asset. In other words, the value of the stock in the market is dependent on the value of the underlying asset. Strike price is a term that is used for the price at which the option contract is purchased or sold. For example, let us suppose that you have an option to buy or you intend to make a call at £10. The value of the underlying asset is only £8. Then you are £2 below the strike price. You will certainly not like to buy an option that has face value less than the intrinsic value. Speculation is associated with risk and long position. Such speculations are based on your expectation of higher price compared to the strike price. Hedging is the reverse of speculation, and is the cautious side of the option trading. They are generally associated with puts and short positions. In here, you anticipate that the price would drop below the strike price, which has a expiration date, by which your option must be exercised. Stock option trading is both exciting as well as risky. But if you play your cards correctly, there are scope of getting a substantial return.
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