Options trading can increase the profits you make when trading Stocks if you understand how to use them and know what you are doing. Options can be a very useful tool that the average investor can use to enhance their returns. This article – Options Trading Basics, looks at what options are and discusses some of the options trading strategies traders can use with these versatile instruments. Options give the buyer the right, but not the obligation, to buy (a call option) or sell (a put option) the underlying Stock or futures contract at a specified price up until a specified date. An investor can purchase a Put option as insurance against a decline in the Stock price or a Call option in case the Stock rises. Buying an option gives the purchaser time to decide whether they will buy or sell the underlying Stock. The price is locked in until the expiry date, which in the case of LEAPS can be years into the future.
Options trading has several advantages that every Stock Market investor should be aware of, such as high leverage, lower overall risk than owning the physical security, more versatility and the ability to generate extra income from a current Stock portfolio. An option’s value fluctuates in direct relationship to the underlying security. The price of the option is only a fraction of the price of the security and therefore provides high leverage and lower risk – the most an option buyer can lose is the premium, or deposit, they paid on entering into the contract. By purchasing the underlying Stock of Futures contract itself, a much larger loss is possible if the price moves against the buyers position. An option is described by its symbol, whether it’s a put or a call, an expiration month and a strike price. A Call option is a bullish contract, giving the buyer the right, but not the obligation, to buy the underlying security at a certain price on or before a certain date.
A Put option is a bearish contract, giving the buyer the right, but not the obligation, to sell the underlying security at a certain price on or before a certain date. The strike price is the price that the buyer can either buy call) or sell (put) the underlying security by the expiration date. The intrinsic value is the difference between the current price of the underlying security and the strike price of the option. The time value is the difference between current premium of the option and the intrinsic value. The time value is also influenced by the volatility of the underlying security. Up to 90% of all out of the money options expire worthless and their time value gradually declines until their expiry date. This clue offers traders a very good hint as to which side of an options contract they should be on…professional options traders who make consistent profits usually sell far more options than they buy. Discover more insider secrets and the exact proven strategies to trade stocks profitably please visit at ExpertOptionTrading.com/.