Options Trading Facts

By www.options-trading-education.com

Options Trading Facts


An often used method of trading stocks,
currencies, or futures is online options trading.
By trading options, a trader limits his or her risk
and exercises a degree of leverage as well.
Traders use both fundamental and technical
analysis to gain insight into the equities that
underlie the options contracts that they trade.


There are a number of potentially profitable
options strategies but one must learn the basics
before moving on to more complicated things in
options trading. With that thought in mind here
are a few basic options trading facts.


• Options Trading Facts I
An options contract is a financial instrument that conveys
to the buyer the right to buy or sell a stock, futures
contract, or currency at a set price, called the strike
price. This price remains stable no matter what the
market price of the underlying equity does. Thus the
value of an options contract rises or falls based upon
the difference between the equity price upon which
the contract was based and the current price, known
as the spot price.


Options contracts also have what is referred to as time
value. If, for example, a stock is rising and an options
contract on that stock has a long time to run, the
contract will commonly be more valuable as speculators
believe that the options contract will become more
valuable with time. When there are only few days left
until expiration of an options contract, its time value
becomes negligible as there is little time left for the price
to rise.


• Options Trading Facts II
Whereas buying an options contract gives the
buyer the right to buy or sell the underlying
equity it does not obligate the trader to do so.
On the other hand the seller of an options
contract is paid money for taking on the
obligation to sell or buy the underlying equity if
and when the buyer chooses.


Because sellers set the prices of options
contracts, options sellers tend to make more
money over time than options buyers. However,
the seller of an options contract, also called the
writer of the contract, takes on a risk.


There are times in volatile markets when sellers
can lose substantial sums of money. Thus the
business of writing options contracts is largely
limited to large institutions with a high degree of
expertise and very deep pockets.


• Options Trading Facts III
Options traders use calls and puts in search of
profits in Forex, futures, and stock option
trading. The buyer of a call contract pays
money for the right to buy the underlying at
the strike price, up to the expiration date of the
options contract. He or she will only do so if
the price of the underlying moves up.


At that time he or she may execute the contract
and buy the equity and simultaneously sell it for
a profit. Alternatively, he or she may simply sell
the options contract, which is now more
valuable, and pocket the profit, never touching
the underlying stock, futures contract, or
currency.


In buying a put on a stock, commodity future, or
currency the trader pays for the right to sell the
underlying. If the price of the underlying falls he
or she will do so and simultaneously purchase
the same, or simply sell the contract. These are
basic options trading facts and necessary in
order for one to begin the process of becoming
a successful options trader.

Options Trading Facts

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Options Trading Facts