There are 4 special types of players in the stock option trading competition. They are buyers of calls, vendors of calls, purchasers of puts, and sellers of puts. The buyers are called holders, and the vendors are called writers. Buyers of calls are said to have a long position, while sellers of puts are said to have a short position.
Calls are useful in speculation, and puts are helpful in prevarication. It is all going to depend on the hit price of the underlying quality on the expiration date. If all of this makes perfect sense to you, there is not much need to read on, but if it feels a bit hazy, a little review might be helpful.
The Stock Option market has its own unique language. Similar to many other actions, an understanding of the language employed is essential. In most cases, it is a rather an easy theory buried behind mysterious phrase that leads to puzzlement, and makes the activity looks a lot more complex than it actually is. The following are some definitions that might assist to take away some of the vagueness.
– Calls: A call is simply an agreement giving you an option, but not an obligation to buy a set of stocks at a particular price on or before a certain date. In understanding a call, it is important to consider that you are not obligated to make the purchase. You can exercise your option or not.
– Puts: A put is the contrary to a call – it is an agreement to sell a block of stock at a set price on or before a definite date. Again, this is a choice. You can make the choose not to sell.
– Holders: This is the name given to the purchasers of the contracts. It is the holders that give the option trading market its name because they are the ones who actually are in a position to make the choice to apply their options.
– Writers: Since it is a “trading” market, two parties are essential. If someone is buying, than someone else must be vending. The writers are the sellers of the contracts. It is vital to remember that the writers are not the ones with the options. They do have an obligation to respect the contract if the holder chooses to apply his option.
- Long Position: In stock trading, long position means that you are holding the stock in anticipation of it growing in value.
- Short Position: In stock trading, short position means that you are keeping the stock in anticipation of it falling in price
-Underlying Asset: The underlying asset, or as it is sometimes called, the underlying, is the actual stock or protection that is the purpose of the option contract. The contract is said toderive its value from the basic worth of the underlying asset.
– Strike price: This is the cost at which the option contract will be bought or sold. If you choose an option to purchase, or make a call, at $10 , but the value of the underlying asset is only $8, you are $2 under the strike price, and most probably would not wish to apply your option.
- Speculation: This is the jeopardy of taking side of stock option trading. It is commonly related to calls and long positions. It basically means that you are waiting for a stock price to rise higher than the strike price.
- Hedging: This is the cautious side of option trading. It is commonly associated with puts and short positions. You are expecting that the value of the underlying asset will fall lower the strike price. It is named hedging because it is frequently employed to defend an investment, or hedge your bet, by keeping an option to sell at adefinite strike price if the underlying asset takes a serious drop in price. In other words, you are able to bail out before your loss becomes too large.
- Expiration date: This is the date on which your option must be exercised or it will be vanish. It is the deadline. In the stock option market it is typically the third Friday of a month.
Hope this basic stock option trading system guide will help you reach success !!!!
Hassam 