Stock Option Trading Approaches |
Stock Option Trading Approaches
Stock option trading concerns contracts between buyers and
sellers providing the former with rights to buy or sell the stocks
underlying the contracts at a fixed price. As options always derive
from the asset price, they are also called derivatives.
There are two classes of options, namely calls and puts, and four main
participants in the stock option trading market. These are as follows:
- buyers of calls
- sellers of calls
- buyers of puts
- sellers of puts.
Buyers of contracts are called holders. It is actually their position
that explains the option trading market name, as holders always have
the right to decide what option to choose.
The other party in the option trading market is writers. While holders
are not obligated to exercise their options during the set time
interval, writers do have to agree to any of the holders' decisions.
In option trading you may choose between a great number of strategies,
from conservative to high-risk, profiting from all-side market
movements. In case you have solid reasons to believe that a stock price
is going to grow, use the risky speculative strategy and watch the
strike price to be exceeded until you choose to exercise the option of
calling the block of stocks.
If, on the contrary, you anticipate a decline in the asset price, go
into hedging. The latter strategy is also used as a kind of insurance
to protect one's investments and limit the losses, so you can sell your
stocks before the option expires.
Some more terms used in the stock option trading that can be unclear to
a beginner are Long and Short Position. According to economic
encyclopaedias, taking a long position means buying stocks or other
securities with the expectation that their value will rise. On the
other hand, if the asset in question falls in value as you expected,
you can sell it and that transaction will be made from the short
position.
However, option trading is not restricted to stocks only. There are
other types of investment called Index Option Trading,
Forex Option
Trading and Future
Option Trading.They are described in the respective
articles of our site.
|
|
|
|
|
|