Publisher's Synopsis
By definition, options are financial instruments derived from an underlying asset such as stocks or bonds. They present you with an opportunity to purchase an underlying security at a specific date and price. In other words, options represent contracts that allow you to buy and sell a certain value of an underlying asset at a particular price. Each contract specifies certain terms about the trade.
Options provide you with a very reliable way of investing in stock trading. Just like any other financial transaction, an options agreement or contract is made up of two people -a buyer and a seller. An individual contract represents a number of shares of the underlying security. In most cases, one contract covers 100 shares of stock. The buyer always pays a certain amount against each contract as the premium fee. This amount is always determined by the type of underlying asset as well as the option's strike price.
Traders often use options as a form of investment because of the limited number of risks involved in these derivatives. This is because options enable people to protect their real stocks from financial market exposure. However, care must be taken when dealing with options since, like any other trade, it is very easy to lose a large amount of stock within a fraction of time. They involve high profits, but may also result in high risks if not handled well. Despite this, many people consider options as one of the best and most reliable financial instruments on the stock market.
In this book you'll find:
- Choosing a Broker
- Technical Analysis
- Greeks
- Tips for Success
- Common Mistakes
...And much more!
Options are not real stock. They are derivatives whose price is determined by the price of the underlying security. Other examples of derivatives include futures, swaps, forwards, calls and puts among several others.
Since options only represent a certain asset, the contract entered by a buyer and seller only offers you the ability to trade on the options market. An option call gives you the right to purchase an underlying security at a specific cost and time whereas a put option grants you the capability to sell on the market at a given time period and cost.
Each option transaction represents two sides- the buying side and the selling side.
Selling of an option is also known as writing an option. Each side of an option transaction involves its own rewards and risks. When a person buys an option, it is said that he has obtained a long position when he purchases an option, he has a short position. This applies to both call and put transactions.
In options trading, asset owners do not get involved in the transaction. Cash is only exchanged between the parties involved in the options transactions. Most of these transactions happen between investors, brokers and market makers
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