Understanding Options Trading Terminology
Options trading can seem like a intimidating thing to get in but if you do your search
and understand at least the principles of what should be done, then you will see that it is not quite as intimidating as everyone thinks it is. Before you plan to start with options trading, it is essential that you know and understand 4 basic concepts about it. Long call basics, writing a call, long put basics and selling a put are important to understand and will help you out too much in the long run.
Long Call Basics
Here are the long call basics. When you buy or go long win a call option, which means that you have the authority, but not the compulsion to purchase one hundred shares of stock from the call option seller at the given rate. That price is called the strike price. You owning this authority will only happen for a specific span of time and you will have to pay a premium for it. The longer the time frame and the higher the volatility of the stock, the higher the premium you will pay.
Writing a Call
The words, writing a call, is when you sell somebody the authority, but not the compulsion to buy one hundred shares of a provided security from you at a specific rate within a given time frame. It is possible to write off the naked call which implies that you haven't thought about to fix some limit on your losses anyhow . This can be a probably great risk strategy as you can possibly be on the hook for an endless amount of loss which is never a good position to be in. One of the better ways to protect yourself in this condition is to only write calls against a hundred shares of stock that you already own which means that if the person you sold the call to decided to exercise his authority, then you already have the shares and don't have to go out in the stock market to purchase them. While you are thinking about options trading, you need to keep the risk as minimum as possible.
Long Put Basics/Selling a Put
The reverse of purchasing a call option is to purchase a put option. A put option is a trading option where you have the authority but not any compulsion to sell off hundred security shares to any person within a time frame at a given price. This option gives you the likelihood for huge gains unlike the call option. As with call options, you will pay a premium for the right to sell the shares and the time value of it will slowly go away as the contract gets closer to expiring.
When you sell a put, you offer somebody the authority but not the compulsion to sell you one hundred shares of the provided stock. There is a limited risk with naked call option and all that you lose is the difference between 0 and strike point less the premium you get. When you are option trading you will wish to simply sell a put when you guess the stock rate will increase in value.
Now that you know and understand the concepts of option trading, you can soon start your own option trading business. Doing the right search and talking to people who work and live the trade will be invaluable in your options trading career and will help save you too much of money. Many people say that it is a very scary and risky thing to get into but it really isn't if you know what you are doing and are careful not to take too many risks until you fully understand the process and are comfortable with it.
by: Jamie Hanson
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