Options Basics Tutorial

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When most people think of investment, they think of buying stocks on the stock market, and many are probably completely unaware of terms like options trading. Buying stocks and holding on to them with a view to making long term gains is after all, one of the more common investment strategies.

It's also a perfectly sensible to way invest, providing you have some idea about which stocks you should be buying or use a broker that can offer you advice and guidance on such matters. These options trading and explaination, many investors are choosing to use a more active investment style in order to try and make more immediate returns.

Thanks to the range of online brokers that enable investors to make transactions on the stock exchanges with just a few clicks of their mouse, it's relatively straightforward for investors to options trading and explaination more active if they wish to. There are many people that trade online on either a part time or a full time basis; buying and selling regularly to try and take advantage of shorter term price fluctuations and often holding on to their purchases for just a few weeks or days, or even just a couple of hours.

There are plenty of financial instruments that can be actively traded. Options, in particular have proved to be very popular among traders and options trading is becoming more and more common. On this page we have provided some useful information on what is involved in options trading options trading and explaination how it works. In very simple terms options trading involves buying and selling options contracts on the public exchanges and, broadly speaking, it's very similar to stock trading.

Whereas stock traders aim to make profits through buying stocks and selling them at options trading and explaination higher price, options traders can make profits through buying options contracts and selling them at a higher price. Also, in the same way that stock traders can take a short position on stock that they believe will options trading and explaination down in value, options traders can do the same with options contracts.

In practice however, this form of trading options trading and explaination far more versatile than stock trading. For one thing, the fact that options contracts can be based on wide variety of underlying securities means that there is plenty of scope when it comes to deciding how and where to invest. Traders can use options to speculate on the price movement of individual stocks, indices, foreign currencies, and commodities among other things and this obviously presents far more opportunities for potential profits.

The real versatility, though, is in the various options types that can be traded and the range of different orders that can be placed.

When trading stocks you basically have two main ways of making money, through taking options trading and explaination a long position or a short position on a specific stock. If you expected a particular stock to go up in value, then you would take a long position by buying that stock with a view to selling it later at a higher price.

If you expected a particular stock to go down in value, then you would take a short position by short selling that stock with a hope to buying it back later at a lower price. In options trading, there's more choice in the way trades can be executed and many more ways to make money. It should be made clear that options trading is a much more complicated subject than stock trading and the whole concept of what is involved can seem very daunting to beginners. There is certainly a lot you should learn before you actually get started and invest your money.

With that being said, however, most of the fundamentals aren't actually that difficult to comprehend. Once you have grasped the basics, it becomes much easier to understand exactly what options trading is all about. Buying an options contract is in practice no different to buying stock. You are basically taking a long position on that option, expecting it to go up in value.

You can buy options contracts by simply choosing exactly what you wish to buy and how many, and then placing a buy to open order with a broker. This order was named as such because you are opening a position through buying options.

If your options do go up in value, then you can either sell them or exercise your option depending on what suits you best. We provide more information on selling and exercising options later. One of the big advantages of options contracts is that you can buy them in situations when you expect the underlying asset to go up in value and also in situations when you expect the underlying asset to options trading and explaination down.

If you were expecting an underlying asset to go up in value, then you would buy call options, which gives you the right to buy the underlying asset at a fixed price.

If you were expecting an underlying asset to go down in options trading and explaination, then you would buy put options, which gives you the right to sell the underlying asset at a fixed price.

This is just one example of the flexibility on these contracts; there are several more. If you have previously opened a short position on options contracts by writing them, then you can also buy those contracts back to close that position.

To close a position by buying contracts you would place a buy to close order with your broker. There are basically two ways in which you can sell options contracts. First, if you have options trading and explaination bought contracts and wish to realize your options trading and explaination, or cut your losses, then you would sell them by placing a options trading and explaination to close order.

The order is named as such because you are closing your position by selling options contracts. You would usually use that order if the options you owned had gone up in value and you wanted to take your profits at that point, or if the options you owned had fallen in value and you wanted to exit your position before incurring any other losses.

The other way you can sell options is by opening a short options trading and explaination and short selling them. This is also known as writing options, because the process actually involves you writing new contracts to be sold in the market. When you do this you are taking on the obligation in the contract i. Writing options is done by using the sell to open order, and you would receive a payment at the time of placing such an order.

This is generally riskier options trading and explaination trading through buying and then selling, but there are profits to be made if you know what you are doing.

You would usually place such an order if you believed the relevant underlying security would not move in such a options trading and explaination that the holder would be able to exercise their option for a profit. For example, if you believed that a particular stock was going to either remain static or fall in value, then you could choose to write and sell call options based on that stock. You would be liable to potential losses if the stock did go up in value, but if it failed to do so by the time the options expired you would keep the payment you received for writing them.

Options traders tend to make their profits through the buying, selling, and writing of options options trading and explaination than ever actually exercising them. However, depending on the strategies you are using and the reasons you have bought certain contracts, there may be occasions when options trading and explaination choose to exercise your options to buy or sell the underlying security. The simple fact that you can potentially make money out of exercising as well as buying and selling them further serves to illustrate just how much flexibility and versatility this form of trading offers.

What really makes trading options such an interesting way to invest is the ability to create options spreads. You can certainly make money trading by buying options and then selling them if you options trading and explaination a profit, but it's options trading and explaination spreads that are the seriously powerful tools in trading.

A spread is quite simply when you enter a position on two or more options contracts based on the same underlying security; for example, buying options on a specific stock and also writing contracts on the same stock. There are many different types of spreads that you can create, and they can be used for many different reasons.

Most commonly, they are used options trading and explaination either limit the risk involved with taking a position or reducing the financial outlay required with taking a position. Most options trading strategies involve the use of spreads.

Some strategies can be very complicated, but there are also a number of fairly basic strategies that are easy to understand. You can read options trading and explaination about all the different types of spreads here. There are actually a number of benefits this form of trading offers, plus the versatility that we have referred to above. It's continuing to grow in popularity, not just with professional traders but also with more casual traders as well. To find out just what it is that makes it so appealing, please read the next page in this section — Why Trade Options?

What is Options Trading? Section Contents Quick Links. What Does Options Trading Involve? Below we explain in more detail all the various processes involved. Buying Options Buying an options contract is in practice no different to buying options trading and explaination.

Exercising Options Options traders tend to make their profits through the buying, selling, and writing of options rather than ever actually exercising them. Options Spreads What really makes trading options such an interesting way to invest is the ability to create options spreads.

Benefits of Trading Options There are actually a number of benefits this form of options trading and explaination offers, plus the versatility that we have referred to above. Read Review Visit Broker.

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An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset a stock or index at a specific price on or before a certain date listed options are all for shares of the particular underlying asset.

An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties. For most casual investors, that definition may as well be written in ancient Greek. There are only two kinds of options: Then you can either keep the shares which you obtained at a bargain price or sell them for a profit.

But what happens if the price of the stock goes down, rather than up? You let the call option expire and your loss is limited to the cost of the premium. When you hold put options, you want the stock price to drop below the strike price. If it does, the seller of the put will have to buy shares from you at the strike price, which will be higher than the market price.

Because you can force the seller of the option to buy your shares at a price above market value, the put option is like an insurance policy against your shares losing too much value. Purchasing options can give you a hedge against losses, and in that sense, they can be used conservatively. But there are many options strategies that amount to little more than gambling and can increase your risk to a frightening degree.

Remember, when a call is exercised, stock must be delivered by the seller of the call. If a strong market advance or a major announcement by the issuer has driven the share price up sharply, your losses could be enormous. As indicated, many option strategies involve great complexity and risk. For this reason, not all options strategies will be suitable for all investors. In fact, with the exception of sophisticated, high net worth individuals who can afford and are willing to incur substantial losses, the writing of puts or uncovered calls would be unsuitable for just about everyone.

Nevertheless, brokers sometimes engage in inappropriate options trading on behalf of customers who do not understand the risks. If you have lost assets because your stockbroker was engaging in options trading, please contact us today.

Put Options and Call Options Perhaps we can explain options a bit more clearly.