The Basics of Stock Options Trading

By Stock Research Pro • March 25th, 2011

Stock options trading provides a way for investors to profit from the future price of a stock. The owner of a stock option has acquired a right (but not an obligation) to buy or sell a stock at a pre-determined price on or before the date that the options contract has been set to expire. The seller of the option has agreed to fulfill the transaction should the buyer decide to exercise the option. The owner of the option might (and often does) simply choose to let the option expire if the stock price has not moved in the direction they predicted.



The Different Types of Stock Options


There are two basic types of stock options, these are bought and sold just like regular stocks:

  • Call options- These options provide the buyer with the right to purchase the underlying stock at a set price on or before a specified date. An investor who purchases a call option does so with the belief that the stock price will rise before the contract expires.

    • Call options calculator

  • Put options- These options provide the buyer with the right to sell the underlying stock at a set price on or before a specified date. A buyer of a put option believes that the underlying stock will go down in price before the contract expires.

    • Risks and rewards of a Long put strategy


    Stock Options as a Hedge against Portfolio Risk


    Option investors will often use these instruments to hedge against adverse price movements in the stocks they own. The most common way an investor might use stock options to hedge against portfolio risk would be by purchasing put options with the stocks they own as the underlying security. If the stocks go down in value, the investor would exercise these puts to protect against these losses.

    Stock Options Terms to Know

  • Strike price- The agreed-upon price that drives the transaction. For call options, it’s the price at which the option holder can purchase the stock. For put options, it’s the price at which the option holder can sell the stock.

  • Premium- The price paid for the option contract.

  • Expiration- The last day on which the option can be exercised.

    • ______________________________________________________________

    The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

    delicious | digg | reddit | facebook | technorati | stumbleupon | chatintamil
    Comments(0) Options Trading
     

    Leave a Comment

    You must be logged in to post a comment.

    « Stock Market Research Methods | Home | Money Market Investing »