An Introduction to Options Trading
This is the first in a series of posts that I intend to write focusing options. I have used option trades for a number of years now to boost the returns on my investments. I intend to explain what these two financial tools are and show the many ways they can be used. This is exciting stuff. This is also not for the beginning investor!.
Options trading is not for everyone and in fact the majority avoid it. My experience has been that most brokers do not understand this either and that finding a broker who is willing and able to work with you on this can be a challenge. I now use a discount brokerage myself for these trades and that has worked best for me. However, I worked for years closely with a broker before doing this on my own.
I have been reading a number of books on investing and obtaining financial freedom and many if not all of them insist that in order to succeed you need to set specific goals. I do not have time in interest in writing about goal setting now, but this is an important step. I can say this quickly though, goals must be very specific. There is no point, in saying your goal is top make money. That is a given and of no help. A useful goal is to say you want to achieve a 15% return or a 20% return on every trade. One of the purposes of the goal is to eliminate emotion from the investment decision. A goal like a 20% return on every trade helps with this. If the return is less than 20% you do not make the trade, if it is 20% or more you make the trade. This is the type of decision a computer could make and get right every time. This is the sort of system you need to have in place to ensure success.
Now on to options and a quick introduction. This first post is just a quick look at the terminology involved. In subsequent posts I will review some of the strategies that can be used to successfully trade in the option market. If you are impatient there is a link at the bottom of this post for an excellant course in options trading.
An option is a type of financial instrument known as a derivative. It is basically an agreement between parties to exchange ownership of a stock at an agreed upon price within a certain time period. The exchange of the stock is optional and the owner of the option decides if this optional exchange takes place. The agreed price of the exchange is called the strike price. The date on which the agreement expires is the expiry date. The cost to purchase this agreement is referred to as the option premium. If the exchange does take place, then you have exercised the option.
Option premiums are always quoted per stock but are sold in lots of 100 shares minimum. Call options are always an agreement about being able to purchase the stock at the agreed upon price. Put options are an agreement about being able to sell the stock at the agreed upon price. Options come in both European style and American style. European style options are sold on European exchanges while American style options are sold on North American exchanges. The difference is quite simple. European options can only be exercised on the expiry day while American style options can be exercised at any time during the life of the option.
Options are frequently described by the relationship of the strike price to the stock price. An option for which the strike price is equal to the stock price is said to be an "at the money" option. With call options if the strike price is above the stock price the option is said to be an "out of the money" call option. A put option is the opposite of a call option, if the stock price is below the strike price then the put option is “in the money”. Remember a put option is an agreement to sell the stock. Finally, if the strike price is less than the stock price, the call option is said to be "in the money" and the opposite is still true for the put option which is now “out of the money”.
Increase your investment Returns Using Options
Options trading is not for everyone and in fact the majority avoid it. My experience has been that most brokers do not understand this either and that finding a broker who is willing and able to work with you on this can be a challenge. I now use a discount brokerage myself for these trades and that has worked best for me. However, I worked for years closely with a broker before doing this on my own.
I have been reading a number of books on investing and obtaining financial freedom and many if not all of them insist that in order to succeed you need to set specific goals. I do not have time in interest in writing about goal setting now, but this is an important step. I can say this quickly though, goals must be very specific. There is no point, in saying your goal is top make money. That is a given and of no help. A useful goal is to say you want to achieve a 15% return or a 20% return on every trade. One of the purposes of the goal is to eliminate emotion from the investment decision. A goal like a 20% return on every trade helps with this. If the return is less than 20% you do not make the trade, if it is 20% or more you make the trade. This is the type of decision a computer could make and get right every time. This is the sort of system you need to have in place to ensure success.
Now on to options and a quick introduction. This first post is just a quick look at the terminology involved. In subsequent posts I will review some of the strategies that can be used to successfully trade in the option market. If you are impatient there is a link at the bottom of this post for an excellant course in options trading.
An option is a type of financial instrument known as a derivative. It is basically an agreement between parties to exchange ownership of a stock at an agreed upon price within a certain time period. The exchange of the stock is optional and the owner of the option decides if this optional exchange takes place. The agreed price of the exchange is called the strike price. The date on which the agreement expires is the expiry date. The cost to purchase this agreement is referred to as the option premium. If the exchange does take place, then you have exercised the option.
Option premiums are always quoted per stock but are sold in lots of 100 shares minimum. Call options are always an agreement about being able to purchase the stock at the agreed upon price. Put options are an agreement about being able to sell the stock at the agreed upon price. Options come in both European style and American style. European style options are sold on European exchanges while American style options are sold on North American exchanges. The difference is quite simple. European options can only be exercised on the expiry day while American style options can be exercised at any time during the life of the option.
Options are frequently described by the relationship of the strike price to the stock price. An option for which the strike price is equal to the stock price is said to be an "at the money" option. With call options if the strike price is above the stock price the option is said to be an "out of the money" call option. A put option is the opposite of a call option, if the stock price is below the strike price then the put option is “in the money”. Remember a put option is an agreement to sell the stock. Finally, if the strike price is less than the stock price, the call option is said to be "in the money" and the opposite is still true for the put option which is now “out of the money”.
Increase your investment Returns Using Options
posted by John at 9:45 AM
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