Take the Time to Fully Engage in Option Education
It can be a challenge to get a handle on buying and selling stocks, but trading options is even a bit more complicated. Like many things in life, the risks in option trading are greater, but the potential rewards are as well. If you’ve ever looked at an options quote, you have probably noticed that there is more information than there is in a simple stock quote. On a typical call option quote, you’ll see different strike prices and different expiration months, plus different option symbols for the same stock. An option quote will list three prices:
Last price (the last traded price of the option)
Bid price (the price a counter-party is willing to buy the option for)
Ask price (the price a counter-party is willing to sell the option for)
The bid-ask spread is the difference between the bid and the ask prices. In general, blue chip stocks will have narrow bid-ask spreads, while the stocks of smaller companies’ will have much larger spreads. As the strike price on an option increases, call prices decline and put prices rise.
How Call Options are Purchased
If you buy a call option on Company X at a strike price of $90 where the bid price is $8.50, you will pay a premium of $850 ($8.50 x 100 shares) for the right to purchase 100 shares of Company X at $90 per share before the expiration date, which is the third Friday of the month in which the option expires.
If you buy or hold an option and decide to exercise it, the seller of that option is obligated to fulfill the terms of the contract. So in the above example, the seller of the option has to deliver 100 shares of Company X at the $90 per share strike price, or a total of $9,000. If the stock price has risen above the strike price by more than the $850 you paid as a premium, you profit. Options clearing corporations operate behind the scenes to match up buyers and sellers, who each agree to fulfill their end of the bargain. Most options traders close out their position before the expiration date, though some allow them to expire.
Making the Most of the Available Information
The key to successful options trading is learning to use information wisely. Finding a trading platform that not only offers you tools, but also option education features, gives you the opportunity to learn about appropriate options trading strategies to maximize your chances of success. Trading platforms with online research facilities help you develop your strategy and keep up with current market conditions while monitoring stocks you’re interested in.
Option Education
Any online option trading platform can offer trading tools, but a trading platform that offers on-site option education tools offers that much more to the site’s users. Trading options without an understanding of how options work and how to evaluate the stocks underlying the options is a very risky approach. Using a trading platform that helps you learn and develop a solid strategy ensures that you maximize your chances of using options trades to enhance your investment portfolio.
Chris Robertson is an author of Majon International, one of the world’s MOST popular internet marketing companies on the web.
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