Before you can begin options trading, you will need to know all that you are able to learn about options trading. What is it? What can it do for you? The different types of options. All of these are important to know so that you can make an informed decision on if this trading option is what is best for you.
When looking at options trading, it is essentially the contract that allows the buyer to have the ability to be able to buy or even sell the underlying asset. However, it has to be sold at a particular price and needs to be sold before a certain date. Options are a binding contract that comes with clearly defined terms and properties.
For example, while searching the housing market for a house for your growing family, you come across one that is going to be perfect not only for the kids that you already have but the one that is on the way. However, you do not have the cash at the present moment to be able to purchase it; but you will within the months that follow. While talking to the homeowner, you are able to work out a deal where you will have the choice of buying the house in that time period at a price of $150,000. The owner will then agree to offer you the option of the extended pay, but, in order to keep this option, you must first put down a payment of $5,000 so that they know that you are serious.
When you are looking at this example, there are two points that need to take away from it.
One: when you buy an option, you will have the right to continue with the purchase, but are not going to be obligated to continue with it. If you decide to let the expiration date pass by without making an effort to keep to the agreement that was made, then you will end up losing all of what you invested.
Two: the option is simply a contract that will deal with any underlying assets. Because of this, options are called derivatives. This means that the option is deriving value from another place. In the example, our underlying asset was the house, but, a majority of the time the underlying asset is stock.
The types of options that you are going to find are called calls and puts.
A call is when the holder has the ability to buy an asset for a specified price in a given period of time. The calls are similar to the long position in stock trading when you are buying calls; you are going to hope that the stock will end up increasing before your option expires.
A put gives the owner the ability to sell off their asset for a particular price in the specific time period that they are given. When looking at stock, this is like having a short position. The buyer of a put is going to hope that the price will end up falling before the option expires.
As we’ve already explained, there are two types of options. But, there are four different participants in the options market. There are the buyers and sellers of calls as well as the buyers and sellers of puts.
When you are buying an option, you are considered to be a holder; but if you are selling the options, then you are considered to be a writer. If you are a buyer, you are going to have a long position while the seller is going to have a short position.…
There are two reasons as to why you should use options. These reasons are called “to hedge” and “to speculate.”
Hedging is considered to be an insurance policy when it comes to options trading. You
are able to insure everything from your house to your car, but you are also able to insure
your investments from any downwards slide there might be in the market. You will find people that say that you shouldn’t trade the stock if you think that you need to have a hedge.
However, you can benefit from having a hedge on your investment. Using the options in your stock, allows you to restrict any loss you might experience on your stock if the market decides to crash.
The best way to look at speculation is as if you are betting on any movement security will or will not make. Options will give you the advantage of not being limited in only making a profit as the market is trending upwards. Since options are so versatile, you can make a profit even if the market is trending downwards.…
When you are looking at options, there are two main types. Calls and puts are considered to be types of options, but they are different kinds of options than these.
The first option is the European options. These are distinct from the American options because they can only be allowed to be exercised at the end of the options life. The second type of option is the American option. The American option is only authorized to be used for the time that the option is purchase and the expiration of the option. Most exchange trade options are considered to be American options. Even though their names suggest that they are exclusively used in America or Europe, these option types do not have anything to do with geographic location.
A long term option is called a long-term equity anticipation securities otherwise known as LEAPS. The LEAPS provide the opportunities needed to control, speculate, and manage the risk that you are going to take. These options are identical to the regular options. However, the LEAPS will also provide you a longer period for you to make your decision. LEAPS are not available on all the stocks that you may have, but they can be found on most of the ones that are widely held.
Financial gurus at Top-Companies stated that many Americans are turning to their structured settlement and selling it in to get out of debt, buy a home or send the kids to college. All good reasons that sound good on paper, but it is really the best option for you and your financial future? Sometimes you make decisions for the short term and don’t think of the ramifications of a decision today will have on you 5-10 years from now.
Selling your structured settlement could be one of the last things you may want to consider, but your top focus should be to discuss your issues with a financial expert. Because if you are having trouble tackling your bills right now, you are going to have problems again. Your problem probably lies more in managing your money and spending habits than your ability to have enough to pay your bills.
It is highly advisable for you to contact the National Foundation for Credit Counseling, which is a non-profit organization that will help you find a good debt counselor near where you live. The recommended NFCC counselor will discuss with you the current situation you are in, help you create a budget which makes sense, and to contact your creditors to figure out the best path for you. If that means cashing in your structured settlement, they are the best ones to answer that question.
What about structured settlement companie? Yes, you can contact them regarding your options, but if your problem is a spending problem, you will just dig yourself into a deeper hole. You need to focus on solving the problem instead of merely putting a band aid on it.
The calls and puts that are mentioned above are considered to be plain vanilla options. Being that options are so versatile and that there are different types as well as options, you are going to have to choose the one is best for you. The non-standard are called exotic options. These options can either be payoff profiles for the vanilla options or even an entirely different product that has an optionality that is built into them.
An option will look something similar to this:
Upon first glance, it looks confusing and is hard to tell what it is trying to say us. However, when doing options trading, you will need to know what this means because you will see it for all your option trades.
The AAPL is the options root. This is going to be somewhere between one to six letters that will indicate the underlying security. This will usually be the company in which the stock is located.
12 is the year. This is going to tell you when the option will expire. For this example, it will end in the year 2012.
The month is 07. This will quite obviously tell you the month that the option will expire. For this option, it will be July.
Finally, the expiration date will be 21, so the option will expire July 21, 2012. Since the market is closed on Saturdays, options will typically close on the third Saturday of every month. But, as we just mentioned, the market is closed on Saturdays so it will expire on Friday the day before.
The type of option is going to tell you if the option is a call or a put. The C will indicate that it is a call while a P will suggest that it is a put. For this one, it is a call.
The last numbers are going to be the strike price. The price is going to be one to nine numbers where the first five are the strike dollar, and the last four are the strike decimal. For this example, the strike price is $600.
This is not to say that a broker may not have made their own format for writing out this information. You are going to need to ask your broker on what their format is so that you are not writing it in the wrong format. If they do not have their own format, then the format that we just discussed is going to be the industry standard.
How an option is priced:
An option is going to be priced based on its stock price, volatility of the underlying stock, and the time that is left before it happens to expire.
The stock price is the underlying security. As soon as you have identified the underlying asset on which you want to trade options, you are ready to start. The price will affect the price of the option that is available. It is going to be the predominate factor in the pricing of an option.
Options will expire, so it is important to get the value out of it before it erodes. While the option closes in on its expiration, time decay will accelerate since there is less time for the option to move in the trader’s favor. It is a good idea to factor this into your options trading decision because you may find that you are going to want to get options that have more time on them so that they will have enough time to make a positive change.
The volatility is the second most important factor when it comes to deciding what an options price is going to be. The options on stocks that have stayed stable for a while are going to be more predictable when it comes to price. Those stocks that less predictable are going to be harder to determine what they are going to cost because
their stock does not stay in one place for long. When the stock begins to move, the trader is going to adjust the implied volatility up which means that the premium will rise for the options despite if any of the other factors have not changed. Options that have had investors lock in on a set price are going to be more valuable because they are going to be more likely to buy stock.
Each option that you encounter is going to have a bid price as well as an asking price. This just means that you are going to buy around the asking price and sell around the bid price. The difference that you see between the ask and bid prices is going to be called the spread. The narrower the spread is, the better liquidity will be. The liquidity is going to be how quickly you can move around in the position you are in.…