Understanding the options trading

Options trading is different from your traditional stock. In this case, you give a buyer the right to buy or sell an asset, without any underlying obligation. These options have strictly defined terms with them and often a specific price or certain date the transaction must be completed.

There are two main types of options in the market. The first is the American option. Where the buyers must execute between the date the option first becomes available to purchase and the date that the option is set to expire. Most of the traded options on the stock exchange fall into this category. European options are the second type and may only have their options exercised at the end of their life. Despite their titles, they have nothing to do with where the stocks are located. Both options may include long-term options that cover two or more years, or exotic options that add additional variances.

When reviewing your options, you’ll note there are a few characteristics. They include:

•    The buyer may buy or sell their asset. 

•    They have a premium that allows them to own the option.

•    The price is impacted by the fixed price and is determined at the beginning of the transaction. 

•    Buyers may exercise their right to buy or sell the underlying asset. 

•    An expiration date is a final date that an option holder may buy or sell their asset. 

Options trading - why do people trade them? 

There are three reasons. It gives them leverage over an investment with minimum volatility. There aren’t sudden changes or spikes as the details of the option are set and adhered to during a transaction. This allows the investor to make a profit off their option. With the protection offered, there are no transaction surprises and insurance can be added if desired.

When considering options trading, it is important to note you have three options for these transactions. You can ask you broker to hold until maturity. This is where you wait until the last date of the contract period to make the trade. 

You may also choose to trade before the expiration date if the value of the option increases in value beyond the agreed upon price. If you determine that the trade isn’t profitable for you, you may choose to let it expire. There is no profit and the option simply becomes null and void. You didn’t lose profits and the loss experienced was negligible.

Stock market options trading offers investors the potential to earn generous returns on potential investments. If this area of trading interests you speak to a stock broker today. With dozens of options available, you’ll have a chance to find an investment opportunity that meets your needs.

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