Option Trading, Options, Future Option Trading, stock option trading, commodity option, option strategy   Option Trading, Options, Future Option Trading, stock option trading, commodity option, option strategy 
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Option Trading

Home > Options > Option Trading

Option Trading, Options, Future Option Trading, stock option trading, commodity option, option strategy
Options are one of the most versatile trading instruments ever invented. Since option purchases cost less than buying the underlying stock, they are a high leverage approach to trading that can considerably limit the overall risk of a trade or provide additional income. Simply stated, option buyers have rights and option sellers have obligations. Option buyers have the right, but not the obligation, to buy (call) or sell (put) the underlying stock (or futures contract) at a specified price until the 3rd Friday of the expiration month. There are two kinds of options: calls and puts.

Call options come with the right to buy the underlying asset. Put options come with the right to sell the underlying asset. It is critical to become familiar with the inner workings of both. Every strategy you learn from here on depends on a thorough understanding of these two kinds of options.

There are no margin requirements for purchasing an option because the risk is limited to the price of the option. Option sellers receive a credit in their account for selling an option and get to keep this money if the option expires worthless. However, option sellers also have an obligation to buy (put) or sell (call) the underlying instrument if their option is exercised by an assigned option holder. Therefore, selling an option needs a healthy margin.

You must be acquainted with the select terminology of the option market to trade options. The price at which an underlying stock can be bought or sold if the option is exercised is called the strike price. Options are available in many strike prices above and below the current price of the underlying asset. Stocks priced below $25 per share normally have strike prices at 2- dollar intervals. Stocks priced over $25 normally have strike prices at $5 dollar intervals.

The date the option expires is called the expiration date. A stock option expires by close of business on the 3rd Friday of the expiration month. All listed options have options available for the current month and the next month as well as specific future months. Each stock has a corresponding cycle of months that they offer options in. There are three fixed expiration cycles available and each cycle has a four-month interval:
  1. January, April, July and October
  2. February, May, August and November
  3. March, June, September and December
The price of an option is referred to as the premium. An option's premium depends on a number of factors including the current price of the underlying asset, the strike price of the option, the time remaining until expiration, and volatility of the underlying asset. An option premium is priced on a per share basis. Each option on a stock corresponds to 100 shares. So, if the premium of an option is priced at 2, the total premium for that option would be $200 (2 x 100 = $200). Buying an option creates a debit in the amount of the premium to the buyer's trading account. Selling an option creates a credit in the amount of the premium to the seller's trading account.

In review: How Options Work

- Options give you the right to buy or sell an underlying instrument.

- If you buy an option, you are not obligated to buy or sell the underlying instrument; you simply have the right to.

- If you sell an option and the option is exercised, you are obligated to deliver the underlying asset (call) or take delivery of the underlying asset (put) at the strike price of the option regardless of the current market price of the underlying asset.

- Options are only good for a specified period of time, after which they expire and you lose your right to buy or sell the underlying instrument at the specified price.

- Options are bought at a debit to the buyer.

- Options are sold by giving a credit to the seller.

- Options are available in several strike prices representing the price of the underlying instrument.

- The cost of an option is referred to as the option premium. The price reflects many factors including the current price of the underlying asset, the strike price of the option, the time remaining until expiration, and volatility.

- Options are not available on every stock. There are around 2,200 stocks with tradable options. Each stock option represents 100 shares of the company's stock.


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