Why Consider Option Trading In An Investment Account

Why Consider Option Trading In An Investment Account

Online trading sites are now providing the opportunity for all investors to pursue option trading in the stock market. There is a broad range of availability, but an individual should understand the difference between the existing types prior to choosing this type of investment. There are three main options available; puts, calls and warrants.A put is an option to sell an underlying asset. What this means is that, the person writing the put will create a contract by which they state they will sell an asset at a given price at a future date. These contracts are then bought and sold on the stock market until that date. It is a gamble by the purchaser because they are betting on the price of the asset to rise so that they can purchase it for less than market value.A call is the opposite of a put. It is an option to sell an underlying asset. Therefore the holder of the contract wants the price of that asset to fall so that the writer must pay them more than what the item is worth.A warrant gives the owner of the options contract the right to purchase certain securities at a specified price within an allotted time frame. So, if the market price of the securities rises, then the owner can buy the stock at the cheaper price and resell them in the market to make a profit.In options trading, the buyer is the person that holds the contract and has the right to buy the asset when it expires, if they wish. Purchasing the underlying asset is not required. There is also the option seller, maker, or writer. This is the person that currently owns the goods, or intends to sell them, when the contract comes due.These contractual obligations are traded in the market very similar to securities. While they can be very risky because the investor must correctly guess the direction in which the market value of the item will move, they can also be very lucrative. The use of leverage allows for great gain potential should the asset move in conjunction with the buyer's wishes.Listed options are traded on the CBOE, AMEX, Philadelphia and Pacific stock exchanges. Most online investment institutions offer the choice to trade in options if a person indicates that they are interested. Trading on an exchange helped to standardize expiration dates so that all options now expire on the third Friday of the expiration month.There are numerous types of assets for which options are written. These include exchanges, stock indexes, debt securities, and currencies. The buyer is then making a call as to whether the price of each of these is going to move in a certain direction based upon whether a put or call has been bought.Option trading opens up the possibility for significant gains if the investor can accurately predict price movements. It is now available through many online brokerage firms in a retirement or investment account. Understanding how an option is used is beneficial in determining whether or not this type of investment should be pursued.

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