Investing - Options Trading Basics

The options can be a good way to invest your money, even if they are not rich to begin with. If you already have a basic knowledge of trading in shares and bonds, you are well aware of the wide range of strategies that can be used. Everything from the basic buy and hold for those using complicated technical methods of analysis are used. Similarly, there is a similar series of strategies, which can be used for the exchange of options.

Essentially, the options are contracts giving the right to buy or sell a specific stock, bond or other underlying instrument at a particular pre-determined price within a specified timeframe. Options, which give an investor the right to purchase, are known as call options, while those that give the right to sell put options.

The investor may act at any time up to and including the expiration date, if one takes what is known as an option "American", while those known as "European" options may be granted an effective date. There is no real geographical difference in these types of multiple options, even though they historically belong to the United States and Europe. American options are often used for stocks or bonds, while the European versions are commonly used for indexes.

The date usually falls on Saturday after the third Friday of the month in which the option contract. Since most investors will be able to contact a broker on Saturday, and U.S. exchanges closed, the due date will actually be the third Friday of the month.

With an investment in an American style option, for example, an option in shares, there are two possible outcomes. The investors can wait for the expiration date, or may act before the option is mature. (Obviously, for a European style option there is no such decision to be made). Many investors do not wait for the expiration date before you do anything, no matter what option they have.

A typical choice will be for a hundred lots of action. If the investor is buying a call (right to buy) option for two dollars in a way that has a strike price of twenty dollars, then this will cost them (2 + 25) x 100 U.S. dollars, which is $ 2700 , plus commissions. As long as the market price is higher at twenty dollars, the investor is doing well.

If the investor believes that the price has reached its peak before the due date, it is unlikely to recover again, and is especially twenty-seven U.S. dollars, which then can sell quickly and make a good profit.

It can also be sensitive to sell before maturity if the price is lower than the strike price and is likely to continue to decline, or is already very close to the expiration date and probably will not be able to recover. Leaving early can reduce the overall loss. E 'can use this loss to offset capital gains tax too.

There is a third choice, and instead to act before the expiration date or waiting for the option to reach maturity. The option is the ability to buy or sell, but does not require the investor to do so. The contract may be allowed to expire, no action or before the due date. Can result when a minor loss to let the option expire instead of using it. There is no obligation to make your purchase or sale of rights, as opposed to when you put your money in the future. Whether or not it is a good idea to give your law depends on a number of factors such as the strike price, the market price and the premium.

As with any investment, options involve risk. The rise and fall of stock prices and other underlying instruments occur unpredictably unpredictable periods of time. The price of an option can vary over time based on these fluctuations and the length of time remaining before expiration. The expiry date is an important feature of trading options, such as its distance in time to influence investor decisions .......