Option Trading

Is Option Trading Safe?

An option is a contract that gives the owner the right to buy or sell a security at a particular price on or before a certain date.

There are two types of options:

1.) The Call Option: Investors purchase these if they believe the value of a particular security is going to rise before the option expires.

2.) The Put Option: Investors purchase these if they believe the value of a particular security is going to fall before the option expires.

The Premium, or the price that the buyer pays to the seller for the option, has two components.

The first, known as the "Intrinsic Value", is the amount of profit that would be realized upon the immediate sell of the option. An option that has value is known as "In-the-money". An option with no intrinsic value is known as "out-of-the-money" or "at-the-money".

The second component is "Time Value". This is the probability the option will gain intrinsic value before it expires. The closer the option gets to its expiration date, the less attractive it becomes to investors.

The price at which an underlying stock can be purchased or sold if the option is exercised is known as its strike price.

Many investors consider option trading a form of insurance against adverse price movements. In other words, they hedge their positions. For example, if you own a particular stock and thought it was going to drop, but didn't want to sell, you could purchase a put option to make money on the declining price of the stock.

An option can not lose more money than the initial amount invested and is never subject to a margin call. An investor can maintain their market position despite adverse price moves. These two factors make it much more attractive than futures investing.

Option trading should be done on paper to help you understand the process better. When you feel comfortable paper trading, then you can move on to actual trading.

For more In-Depth Information:

Options Trading Signals

1.) Strike Price: The stated price per share at which the underlying security may be purchased, or sold, by the option holder when they exercise the option contract.

2.) At-The-Money: The strike price of the option is equal to the market price of the underlying security.

3.) In-The-Money: The strike price is greater than the market price of the underlying security.

4.) Out-Of-The-Money: A Put Option is Out-Of-The-Money if the strike price is less than the market price of the underlying security. A Call Option is In-The-Money if the strike price is more than the market price of the underlying security.

5.) Underlying Security: The security being purchased or sold when an options contract is being exercised.

6.) Expirations Date: The day in which an Options contract becomes void.

7.) Premium: The price of an options contract.

8.) Writer: The seller of an options contract.

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