subject: Understanding Trading Stock Options Fundamentals In Order To Increase Earnings With Options trading [print this page] Understanding Trading Stock Options Fundamentals In Order To Increase Earnings With Options trading
Let's talk about options, shall we! Few people trade them and fewer know what they are. An option is the act of buying time - time to do something. If I buy an option, I have finished the first part of the agreement I have with the other party. Understanding the basic terms for options is one of the first steps for being able to trade profitably in options. Options trading can help you manage risk and can be profitable but you must have a good foundational knowledge to really benefit from them. In this article I want to introduce you to a few of the basic terms you will run into when you are trading options.
Financial options are defined as contracts that allow you to purchase or sell a specified financial product, called the 'underlying interest' or 'underlying asset'. With equity options, the owner - or holder - possesses the right, but not an obligation, to either purchase or sell, depending on the type of option, shares of an underlying security at a specific price by a specified expiration date. Typically, an equity option will represent one hundred shares of the underlying stock or security. Because of this, adjustments are made to the size or strike price of an equity option in order to account for any underlying stock splits or mergers.
The hardest part of options trading is understanding all the jargon. But once you understand all the technical names, you'll soon find out that basically what you really need to know is which way you think the stock price is going to go in the near future. Once you have an idea what's going to happen, then all you need to do is use the right option trade to profit. For instance, if you expect a stock's price is going to increase, then you would purchase a call option on that stock.
Now remember all an option is a contract between a buyer and a seller. In a contract both parties have to agree upon certain things. One of the first things that the two parties need to agree upon is the strike price. Simply put the strike price is the price in an options contract at which the underlying instrument is bought of sold if the options is exercised. So the buyer of the options contract reserves the right to purchase or sell the underlying instrument for a specified price or strike price. Think of it as the price you are locking in for a premium.
