January 9, 2009
Stock Options - What you Need to Know
Call and What?
An option is a “legal financial contract”. The holder has the right, but is under no obligation, to accrue or sell a predetermined number of stock shares. This is to be done at a price that has been predetermined which is called a strike price. It is also to be accomplished on or before a specific date.
There are just two basic types of stock options, the European and the American. An American stock option is a contract that can be exercised between the purchase date and the expiration date.
Each stock option is designated by the following:
• Name of the stock
• Strike price
• Expiration date
• The premium that was paid for the option plus the broker’s commission
Two of the most popular types of stock options are Calls and Puts. If you own a call you have the right but are not obliged to buy a stock at the strike price at any time before the stock option expires. If an option expires, it is useless and worthless.
The other most common stock option is the PUT. This is almost the exact opposite of a Call. If you own a put you have the right, but are not obliged, to sell a stock at the strike price any time before the expiration date of the option.
How in the world do people trade these stock options? Stock options traders will rarely exercise their option and purchase (or sell) the underlying security. Instead, they will buy back or sell the option. This saves on commissions.
Options officially expire on Saturday following the third Friday of the month in which the option expires. Shares of stock have a 3-day settlement interval but option settle the very next day. The option has to be traded by Friday in order to settle on Saturday.
Another thing you may hear about with regards to stock options is volume and open interest. Volume is the number of contracts that are traded on any given day. The open interest figure is the number of contracts that are outstanding at any given time.
For those who are curious, a Put-Call theorem has been formulated which defines the following relationship for the price of puts and calls:
P=C-S+E+D
• P= the price of the put
• C= the price of the call
• S= the stock price
• E= the present value of the exercise price
• D= the present value of the dividends
An ordinary investor will see a violation of the put-call parity from time to time. This is not a time to instantly buy, but it is a reason for you to check your quotations for timeliness because as you will probably see at least one of them has expired.
If you want to get into the stock option trading business, then you should probably start by writing covered call option for stocks that are currently trading below the strike price of the stock option.
There are many places on the Internet if you do a search for stock options where you can set up an account for just a small amount of money. My advice to you is to do your research well and only put up as much money as you are willing to part with.
By: Benjamin Wise
About the Author:
An option is a “legal financial contract”. The holder has the right, but is under no obligation, to accrue or sell a predetermined number of stock shares. This is to be done at a price that has been predetermined which is called a strike price. It is also to be accomplished on or before a specific date.
There are just two basic types of stock options, the European and the American. An American stock option is a contract that can be exercised between the purchase date and the expiration date.
Each stock option is designated by the following:
• Name of the stock
• Strike price
• Expiration date
• The premium that was paid for the option plus the broker’s commission
Two of the most popular types of stock options are Calls and Puts. If you own a call you have the right but are not obliged to buy a stock at the strike price at any time before the stock option expires. If an option expires, it is useless and worthless.
The other most common stock option is the PUT. This is almost the exact opposite of a Call. If you own a put you have the right, but are not obliged, to sell a stock at the strike price any time before the expiration date of the option.
How in the world do people trade these stock options? Stock options traders will rarely exercise their option and purchase (or sell) the underlying security. Instead, they will buy back or sell the option. This saves on commissions.
Options officially expire on Saturday following the third Friday of the month in which the option expires. Shares of stock have a 3-day settlement interval but option settle the very next day. The option has to be traded by Friday in order to settle on Saturday.
Another thing you may hear about with regards to stock options is volume and open interest. Volume is the number of contracts that are traded on any given day. The open interest figure is the number of contracts that are outstanding at any given time.
For those who are curious, a Put-Call theorem has been formulated which defines the following relationship for the price of puts and calls:
P=C-S+E+D
• P= the price of the put
• C= the price of the call
• S= the stock price
• E= the present value of the exercise price
• D= the present value of the dividends
An ordinary investor will see a violation of the put-call parity from time to time. This is not a time to instantly buy, but it is a reason for you to check your quotations for timeliness because as you will probably see at least one of them has expired.
If you want to get into the stock option trading business, then you should probably start by writing covered call option for stocks that are currently trading below the strike price of the stock option.
There are many places on the Internet if you do a search for stock options where you can set up an account for just a small amount of money. My advice to you is to do your research well and only put up as much money as you are willing to part with.
By: Benjamin Wise
About the Author:
Stocks Explained If you want to discover your pot of gold in the stock market, then you have to know it inside out. And for all the inside-out information on the stock market explained in simple, concise, layman terms, all you need to do is click on this link: Stock options.
Filed under Finance by Administrator
December 14, 2008
The Golden Rule Of Stock Options Trading
Have you ever lost all your money in Stock Options trading?
If you are like most of us, then you might have lost an entire trading account just trading stock options before. No matter how hard you try, you seem to always lose all your money eventually even if you made some initial profits. Why is that so?
The truth is, stock options trading is risky business! Why is it risky business? Stock options trading is risky because you could lose all your money on any stock options trade if the stock eventually close with the options out of the money during expiration! Yes, even stocks that seem to be rising very quickly and steadily could take sudden and unexpected drops near expiration, taking your in the money call options way out of the money before you can react to it! This means that no matter how certain you are in stock options trading, there is always the possibility of a total loss. Stock options are fantastic leverage instruments but if you simply throw all your money into every trade and hope to strike lottery, then stock options trading would one day wipe out your entire account in one fell sweep.
So, how do we avoid such a predicament?
Simply by applying the golden rule of stock options trading! That is:
Use Only Money You Could Afford To Lose!
Yes, if you could afford to lose only 10% of your account at any one time, you should use no more than 10% of your account on any single stock options trade! This rule is especially important if you are trading out of the money options which have an incredibly high chance of expiring worthless.
For example, if you have a $10000 account and you do not wish to lose more than $1000 at a time, $1000 should be the amount you use on any single stock options trade. Simple as that! The obvious drawback of this rule is that you will not make as much money as you would have if you had simply punted all your money on a single trade, however, just like you would never bet all your money on a single gamble, you should also never put all your money into a single options trade no matter how confident you are! In fact, this applies to any form of trading as well. It takes a little discipline to stick to this rule especially if you are “on a roll” and tempted to go for a “show hand”. Let me assure you that there never is a problem with making lesser money but there always is a problem losing more money!
In fact, when you are using only money that you could afford to lose in stock options trading, you sleep better knowing that you cannot lose more money than you have decided to lose! Your holding power becomes greatly enhanced and you could ride out temporary downturns better than those stock options traders who punted all their money in one trade. This consequently translates to a higher chance of a win as most stocks eventually come back profitably after temporary pullbacks!
So, stick to the “Use Only Money You Could Afford To Lose” golden rule of options trading and you will be safe in your journey to financial success with stock options trading!
By: Jason Ng
About the Author:
If you are like most of us, then you might have lost an entire trading account just trading stock options before. No matter how hard you try, you seem to always lose all your money eventually even if you made some initial profits. Why is that so?
The truth is, stock options trading is risky business! Why is it risky business? Stock options trading is risky because you could lose all your money on any stock options trade if the stock eventually close with the options out of the money during expiration! Yes, even stocks that seem to be rising very quickly and steadily could take sudden and unexpected drops near expiration, taking your in the money call options way out of the money before you can react to it! This means that no matter how certain you are in stock options trading, there is always the possibility of a total loss. Stock options are fantastic leverage instruments but if you simply throw all your money into every trade and hope to strike lottery, then stock options trading would one day wipe out your entire account in one fell sweep.
So, how do we avoid such a predicament?
Simply by applying the golden rule of stock options trading! That is:
Use Only Money You Could Afford To Lose!
Yes, if you could afford to lose only 10% of your account at any one time, you should use no more than 10% of your account on any single stock options trade! This rule is especially important if you are trading out of the money options which have an incredibly high chance of expiring worthless.
For example, if you have a $10000 account and you do not wish to lose more than $1000 at a time, $1000 should be the amount you use on any single stock options trade. Simple as that! The obvious drawback of this rule is that you will not make as much money as you would have if you had simply punted all your money on a single trade, however, just like you would never bet all your money on a single gamble, you should also never put all your money into a single options trade no matter how confident you are! In fact, this applies to any form of trading as well. It takes a little discipline to stick to this rule especially if you are “on a roll” and tempted to go for a “show hand”. Let me assure you that there never is a problem with making lesser money but there always is a problem losing more money!
In fact, when you are using only money that you could afford to lose in stock options trading, you sleep better knowing that you cannot lose more money than you have decided to lose! Your holding power becomes greatly enhanced and you could ride out temporary downturns better than those stock options traders who punted all their money in one trade. This consequently translates to a higher chance of a win as most stocks eventually come back profitably after temporary pullbacks!
So, stick to the “Use Only Money You Could Afford To Lose” golden rule of options trading and you will be safe in your journey to financial success with stock options trading!
By: Jason Ng
About the Author:
Jason Ng is the Founder and Chief Option Strategist of Masters ‘O’ Equity Asset Management ( MastersoEquity.com ) and author of OptionTradingPedia.com . He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.
Filed under Finance by Administrator