What You Should Know Before Answering The Question What Is Options Trading
Have you heard about options trading. The first question that many people who when exploring diversified investment opportunities ask themselves is what is options trading. Unfortunately, there seems to be no easier language to explain this trading, more so if you have never traded in the stock exchange. This article however tries to shed as much light as possible in this seemingly complicated investment opportunity.
The person involved, a trader, has just one major decision to make. He must decide upon a 'call' or 'put' investment. This is similar to saying that he will either buy or sell shares. The investment is also carried out over a certain time, which is the choice of the trader. The trader is under no obligation to trade at any point.
A call decision means that trader thinks that the commodity's price will rise. This is also referred to as a long position. On the other hand, a put decision refers to a short position, meaning the trader expects the price to become lower. Long and short positions have the same risks and rewards.
In order to explain the theory behind this type of trading, one can use a more practical example. Pretend that you would like to purchase a certain property, but do not currently have the cash to pay for it. For this reason, you arrange with the seller of the property to allow you to buy it after a three month period. The seller agrees on the price a particular price, but would like a deposit of about ten per cent of that amount agreed on.
Consider that two diverse incidents related to the property occur within three months. It is revealed that the real estate is Mj's private abode. This hugely increases the price of the home. As you have a contract to purchase it at an agreed amount, the proprietor is obliged to trade it at that agreed price. Conversely, perhaps it is learnt that ghosts wander through the home, resulting in your decision to refrain from purchasing it. Because you purchased an option, you relinquish the ten per cent option money.
This theoretical example illustrates how exactly this form of trade works. When you buy an option you have a right to do something but you cannot be obligated to do it. In simple terms, an option is just an agreement which focuses on an underlying asset. In the example, the property is the underlying asset. However, in most cases, the underlying asset is usually a stock or index.
A call guarantees the holder of the option the right to purchase an asset at a certain pre-agreed price within a predetermined period. The buyer postulates that the price of the stock will increase progressively before the option expires. A put on the other hand gives the option holder the right to sell an asset at a particular price within a given period. Buyers of puts option hope that the price will fall before the option reaches its expiration date.
A trader who buys at a certain price could also be referred to as a holder, but someone who sells could be referred to as writer. Other terms are also commonly used which a trader should become familiar with. Perhaps now you can change your question from 'what is options trading' to 'how can I become a profitable trader'.
The person involved, a trader, has just one major decision to make. He must decide upon a 'call' or 'put' investment. This is similar to saying that he will either buy or sell shares. The investment is also carried out over a certain time, which is the choice of the trader. The trader is under no obligation to trade at any point.
A call decision means that trader thinks that the commodity's price will rise. This is also referred to as a long position. On the other hand, a put decision refers to a short position, meaning the trader expects the price to become lower. Long and short positions have the same risks and rewards.
In order to explain the theory behind this type of trading, one can use a more practical example. Pretend that you would like to purchase a certain property, but do not currently have the cash to pay for it. For this reason, you arrange with the seller of the property to allow you to buy it after a three month period. The seller agrees on the price a particular price, but would like a deposit of about ten per cent of that amount agreed on.
Consider that two diverse incidents related to the property occur within three months. It is revealed that the real estate is Mj's private abode. This hugely increases the price of the home. As you have a contract to purchase it at an agreed amount, the proprietor is obliged to trade it at that agreed price. Conversely, perhaps it is learnt that ghosts wander through the home, resulting in your decision to refrain from purchasing it. Because you purchased an option, you relinquish the ten per cent option money.
This theoretical example illustrates how exactly this form of trade works. When you buy an option you have a right to do something but you cannot be obligated to do it. In simple terms, an option is just an agreement which focuses on an underlying asset. In the example, the property is the underlying asset. However, in most cases, the underlying asset is usually a stock or index.
A call guarantees the holder of the option the right to purchase an asset at a certain pre-agreed price within a predetermined period. The buyer postulates that the price of the stock will increase progressively before the option expires. A put on the other hand gives the option holder the right to sell an asset at a particular price within a given period. Buyers of puts option hope that the price will fall before the option reaches its expiration date.
A trader who buys at a certain price could also be referred to as a holder, but someone who sells could be referred to as writer. Other terms are also commonly used which a trader should become familiar with. Perhaps now you can change your question from 'what is options trading' to 'how can I become a profitable trader'.
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