Options Trading : Free Trials Options Call Put SMS/Call 07316456453

OPTION Trading is becoming more and more popular among individual traders, professionals and institutional investors as it may be extremely rewarding provided that the decisions are well-elaborated and grounded on research…

To explain Options Trading we need to move away from stock market and consider some real life examples…as the person who hold options does not actually own anything except a contract that gives the option to buy or sell something at the agreed price by some agreed time in the future.

 An option contract is an agreement between two parties to buy/sell an asset (stock or futures contract as an example) at a fixed price and fixed date in the future.
An option is a derivative. That is, its value is derived from something else. In the case of a stock option, its value is based on the underlying stock (equity). In the case of an index option, its value is based on the underlying index (equity).

An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties.
It is called an option because the buyer is not obliged to carry out the transaction. If, over the life of the contract, the asset value decreases, the buyer can simply elect not to exercise his/her right to buy/sell the asset.
Let us take an example of real estate. Imagine you want to buy a piece of land, but do not have money right now and would like to secure the land for the price you are prepared to pay. In order to do this, you are happy to pay a 'premium' which gives you the right, but not the obligation, to buy that land for ... let's say 145,000 by a date 6 months away from now. So you enter into a legal contract with the seller to guarantee this purchase price, but only for the next 6 months, after which, the contract expires. Your end of the deal is to pay the seller 6,000 to secure the deal. If you don't buy the land within the agreed time frame, you lose your 6000.

Two scenarios are possible:

1. Before the contract expiry date, the current market price of the land has risen to 160,000 which means that if you exercised your contract rights and purchased the land for the agreed 145,000 you would be looking at an immediate gain of 15,000 less the 6,000 you paid for the option contract - a net gain of 9,000.

2. The second scenario is, that the price of land falls or remains static, by the time the option to buy expires. If you choose to not exercise the option, you are out of pocket by 6,000 and have no asset to speak of. You may choose to still pay slightly above, or equal to the agreed 145,000 but now you will have to add the 6,000 you paid for the option contract to the over fall cost of the asset, which is 151,000. You could do this in the hope that in time, the market value of the land might rise and you'll realize some profit, but on the face of it, it's not looking like a good deal.

In next article we will discuss about Advantages and Disadvantages of Options…

For Free tips in Options SMS PACE 07316456453…Free tips trials in Options