Friday, October 24th, 2014

Stock Option Trading Information

 

The sort of stock option trading information that may be of use to you depends to a degree on your current experience and skill set. Beginners need stock option trading information regarding setting up a trade station, learning fundamental and technical analysis of stocks, and learning basic options strategies. More experienced options traders are more interested in stock option trading information that alerts them to the most profitable trades. Thus an experienced trade may subscribe to an alert service, attend online seminars aimed at more sophisticated approaches to trading. A beginner may start with the technical analysis of options using tried and true systems like the easy to use signals of Japanese Candlesticks. In this article we will focus on stock option trading information for beginners.

What Are Options?

Basic stock option trading information starts with the basic features of options trading, call and put contracts. An option is a contract between two parties. In trading stock options the contracts are standardized. Call contracts give the buyer the right to purchase a stock up until the expiration of the contract. The buyer pays for this right. The set price is called the strike price. This is the price at which the buyer will be able to purchase the stock that underlies the option contract. This price applies even if the market price of the stock rises. In fact, this is the expectation of the buyer. He expects the price to rise and locks in the price by purchasing a call options contract. The seller of a call option obviously does not expect the price to rise and expects to simply pocket the premium paid by the buyer. The opposite of a call contract is a put contract. In this case the buyer expects the price of the stock to fall. He purchases the right to sell the stock at the strike price which is specified in the options contract. If the price falls as expected he can sell the stock at a price far in excess of the now lower market price and pocket the profit.

How Can I Take Advantage of Options?

Our next bit of stock option trading information has to do with strategy in options trading. Traders use options for two reasons, to hedge risk and to make money. Let us say that you invested in XYZ stock based on sound analysis and got in before a major price increase of the stock. You believe that the stock is worth keeping for the long run. But you also think that for the short term the market may have overshot. If that is the case you expect a major correction before the stock starts to rise again. You can hedge your risk in this case by purchasing puts on XYZ stock. You lock in the right to sell at the strike price. If the stock does in fact fall you can sell for close to what is right now the current price of the stock. You can then use the money to re-purchase the stock at the lower price. You make a profit along the way that makes up for the fall in price of the stock. A common use of the call option is to lock in a price at which to buy a stock when you expect the price to rise substantially. Here is where the leverage of trading options comes in. Rather than purchasing the stock that you think will go up in price you simply buy a call contract. You tie up substantially less money in if you purchase the stock. If the stock goes up as expected you can simply sell the call contract as it is now worth significantly more. You make the same profit as you would have by buying and selling the stock but you have done so with a substantially smaller investment.

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