What Is The Purpose Of Option Trading?

Guest Post

Online investment sites have now opened the possibility of option trading to the average investors. Understanding what puts, calls, and warrants are is essential to knowing whether or not to become involved in this type of exchange. The contracts now trade openly in the stock market and can be done in a person’s retirement or investment account.

A contractual obligation to sell an asset at a stated price on a stated date is called a put. The person that purchases this contract wants the price of the good to increase, so that they can buy it cheaper than they could in the market. These contracts are traded in the stock market and every buyer makes a gamble on which direction the price of the asset will move.

Whereas a put is the option to buy an underlying asset, a call is an option to sell. The buyer of the contract hopes the price will fall so that the maker will be required to remit a payment greater than the worth of the items.

A warrant, on the other hand, is written specifically on securities. It is often used in conjunction with a debt offering to allow the owner to purchase securities of a company at a stipulated price for a specific period of time. If the price of that security increases in market value, then the contract owner can buy the stock at the lower price and then turn around and sell it for a profit.

It is not required that the underlying asset be purchased by the buyer. The buyer is the person holding the contract and that has the right to purchase the items if they choose to. The seller, maker, or writer, as the contract creator is called, must sell or buy the asset if the buyer elects to use the terms that were set forth.

To trade these types of contracts is very similar to that of regular stocks or mutual funds. The risk associated with options is great because the investor must accurately guess price movements. However, due to use of leverage, it can be a very profitable means of trading as well with enormous potential for gain. In fact, puts have unlimited gain potential.

If an investor states that they have in interest and the appropriate knowledge base, most online investment banks will allow them to trade options. Those that are listed trade on the AMEX, Philadelphia, CBOE, and Pacific stock exchanges. By listing on an exchange, the expiration dates were able to be standardized to the third Friday of the month in which they expire.

Options can be written on stock indexes, currencies, debt securities and exchanges themselves. Buying a put or a call then suggests that the investor thinks that one of these will move up or down in value. Therefore, there is a broad array of choices for an individual to choose from.

To be conducted in a retirement or investment account, the availability of option trading exists through many online brokerage firms. Comprehension of what a put, call, or warrant is and how it can be used, may provide a beneficial opportunity for an investor. The amount of gains that can be realized is very large if the risk can be handled.

Knowing the most effective way to be a participant in the stock market requires using a quality option trading system for your transactions. You can use options trading techniques that are true and tested.

This Post Has One Comment

  1. Mike

    Insightful article for those looking to begin trading options. Of course, just as important as the predicted future price movement in the underlying security is the time decay factor of options. If you are new to option trading, make sure you educate yourself with articles such as this one, before you start trading options.
    Best wishes for profitable trading,

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