Introduction To Options Trading

Introduction To Options Trading - By: OptionsTrader, Posted on: 2006-12-26

Options are really exciting! It is an investment world where options traders are talking about 30%, 50% and sometimes even as high as 250% returns PER MONTH! Yet they can do it with VERY LITTLE RISKS. In fact, the risk is even lower then buying stocks or a futures contract! So the payoff is really big if you learn how to do this stuff.

Options are available for both stocks and futures and they are similar. They have the same components as you will learn later in this course, the same benefits, the same strategies available, and the same risk profiles for those strategies.

There are 2 types of options - call option and put option.

By definition, a call option is a contract that gives the buyer the right, but not the obligation, to buy a specific asset, at a specific price for a predetermined period of time. For example, if you have a call option for IBM, and this call option lets you buy IBM share for $90 until October, it means that you have the option to buy IBM share for $90, even if the market is selling for $100. And this option is kept open until October. And if IBM shares plummet, let’s say to $80, it makes no sense to buy it at $90. So you can just ignore your option. It is not an obligation to buy. And to own this contract you have to pay a small price for it.

A put option is the opposite. Is gives you the right to sell a specific asset at a specific price for a predetermined period of time. For the same example, if you have a put option to sell IBM for $90, you can sell IBM shares for $90, no matter what the market price is. Even if the market sells it at $80, you can still sell it for $90 because you have the option. Again, if the market is selling IBM for $100, it makes no sense to use the option. In this case you can just ignore your option.

The 5 reasons why professional traders use options:
1. Leverage. In fact, this is the main reason why so many people trade options. A 10% profit in stock can mean 100% profit in options!! You will learn this in lesson 3.
2. Despite the high reward, the risk of options can be kept very low. And you can make trades with limited risks.
3. Unlimited rewards. Limited risk combined with unlimited rewards makes options irresistible!
4. Make money in any direction! We already talked about this.
5. You can apply options in many ways. You can use options to protect your stock holdings like an insurance, to generate monthly cash flow, to capture short-term profits, or to generate long-term capital appreciation.

Let’s discuss the similarities and differences between options and stocks or futures:

Similarities:
• Listed Options are securities, just like stocks.
• Options trade like stocks, with buyers making bids and sellers making offers.
• Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security.

Differences:
• Options are derivatives, unlike stocks or futures; options derive their value from stocks or futures prices.
• Options have expiration dates, while stocks do not.
• There is not a fixed number of options, as there are with stock shares available. New contracts can be generated when there is demand.
• Stockowners have a share of the company, with voting and dividend rights. Options convey no such rights.

An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties. Listed options have been available since 1973, when the Chicago Board Options Exchange, still the busiest options exchange in the world, first opened.

Article Source:- Directory Submission & Sexy Deepika Padukone

www.optionsmindstorm.com offers a FREE 7-day Options Course which includes: - Why selling naked options is extremely dangerous to you - How to make high profits using options - How the risk graph behaves with passage of time - Options strategies that successful options traders use - How risk profile changes by combining options - Risk profile for credit and debit spreads - How to make money doesn't matter if the market moves up or down Sign-up for the free course now: www.optionsmindstorm.com

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