Learn The Basics of Options Trading at Options University
Below is a MRR and PLR article in category Master Series -> subcategory Option University.
Learn The Basics of Options Trading at Options UniversityInterested to pursue a career in options trading? If you are, let Options University handle your options trading education. If you are familiar with stocks or bonds trading, dealing with options is quite similar.
If you are just learning the ropes of options trading, understanding the term can be tricky and challenging at first. In a nutshell, an option is a contract that makes you eligible to buy (call) or sell (put) a stock or bond at a fixed cost (strike price) on or before a certain date (the expiration date).
There is a wide range of options you can choose from in the marketplace. With the American type, you can exercise your option on the purchase and the expiration. European options gives you the option to buy or sell only on the date of expiration. Although geographical in nature, buying options is not an indication that you have purchased a certain kind of option. As a rule of the thumb, American options are applicable to stocks and bonds while European options are for indexes.
Officially, options end on the Saturday after the third Friday of the month of expiration of the contract. However, the effective expiration day of the contract is on Friday as US markets are closed on a Saturday.
When buying or selling an option, you basically have a couple of alternatives-hold the option until it matures or exercise it before the expiration date. A huge percentage of investors prefer the former before the latter. Let us take a look at one scenario:
Supposed you buy at $1 with a strike price of $25. Since options contracts are good for 100 share lots, buying options would be worth $100 and you are eligible to buy $2500 worth of stock using the option. If the option expires and the value of the stock costs $27, buying would be a sensible move since the strike price is only $25. This translates to an immediate earnings of $2.
Another scenario would be if the cost of the share does not hit $27 or the breakeven point of $26. What you can do is exercise the option in order to avoid losing any share.
If the cost of the share is below $26, you can still make a put option for a reduced amount than what you paid and then recover some of your losses.
If the option has already lost its value, you can simply let the contract expire while hoping that the cost would soar again. However, you should be resigned to the fact that your $100 is already lost. Fortunately for you, options is only applicable for buying or selling and does not bind you to do either once your contract expires. Thus, your potential risk is limited to the price that you paid for the option at the onset.
However, you need to be aware that the price of the option is not only dictated by the movement of the price of underlying assets but also its expiration date. As the date of expiration draws near, the price of the option tends to slowly drop. So if you do not intend to hold an option until its expiration, it may be worthwhile selling it earlier than the expiry date.
Learning the basics of trading options can be easy when you let Options University teach you the ropes of the business.
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