To understand options, we consider the following:
Strike Price
Contents
For one to know if a stock can be exercised, they will need to consider the strike price. By the time an option gets to the expiration date, there is a price that it is expected to have. This price should be lower or higher than the stock price, and it is what we refer to as the strike price of an underlying asset. If as an investor, you predict that the value of the stock will increase, you can purchase a call option at the set strike price. When it comes to putting options, the strike price will be the price at which an asset is traded by the option buyer by the time the contract expires. The strike price can also be referred to as the exercise price. It is a major factor to consider while establishing the option value. Depending on when the options are carried out, the strike price will differ. As an investor, it is good to keep track of the strike price since it helps in identifying the quality of an investment.
There are two main option styles. These are European and American options styles. If you intend to engage in options trading, it is advisable to equip yourself with knowledge of the various styles. As you analyze the styles, you will identify those that work for you and those that do not. You will also find that some styles are easier to learn and handle as opposed to others. You can decide to engage in the one that is convenient for you and avoid engaging in the style that you have difficulties understanding.
The American style option allows one to exercise a trade any period between the time of purchase and the time a contract expires. Most traders engage in this style due to its convenience. It allows one to carry out a trade any period within which a contract is considered to be valid. The European style option is not commonly used as compared to the American style. In the European option style, a trader can only exercise their options during the expiration date. If you are not an expert in options trading, I would advise you to avoid using the European style.
Expiration Date
An expiration date refers to the period in which a contract is regarded as worthless. Stocks have expiration dates. The period between when they were purchased and the expiry date, indicate the validity of an option. As a trader, you are expected to utilize the contracts to your advantage, within this time frame. You can trade as much as you can and get high returns within the period of buying and the period of expiry. Learn to utilize the time provided adequately. If you are not careful, the option may expire before you get a chance to exercise it.
We have may beginners who assume this factor and end up making heavy losses. You will be required to be keen while engaging in the stock market. Forgetting to look into the expiry date may result in your stocks being regarded as worthless without getting a chance of investing in them. In some rare cases, the stocks are exercised during the expiry date. This is common in the European option. I would not encourage a beginner to engage in this type of option. It is tricky and could lead to a loss if you are not careful while carrying out the trade.
Contracts
Contracts refer to the amount of shares an investor is intending to purchase. One hundred shares of an underlying asset are equal to one contract. Contracts aid in establishing the value of s stock. Contracts tend to be valuable before the expiry date. After the expiry date, a contract can be regarded as worthless. Knowing this will help you discover the best time to exercise a contract. In a case where a trader purchases ten contracts, he or she gets to 10 $ 350 calls. When the stock prices go above $ 350, at the expiry trade, the trader gets the chance to buy or sell 1000 shares of their stock at $350. This happens regardless of the stock price at that particular time. In an event whereby the stock is lower than $350, the option will expire worthlessly. This will result in making a complete loss as an investor. You will lose the whole amount you used to purchase options, and there is no way of getting it back. If you intend to invest in options trading, it is good to become aware of the contracts and how you can exercise them for a profitable options trading outcome.
Premium
The premium refers to the money used to purchase options. You can obtain the premium by multiplying the call price and the number of contracts by 100. The ‘100’ is the number of shares per contract. This is more like the investment made by the trader expecting great returns. While investing, you will expect that the investment you chose to engage in will result in a profitable outcome. No one gets in business anticipating a loss. You find that one is always hopeful that the investment they have chosen to engage in will be beneficial. You will constantly look forward to getting the best out of a trade.
The above factors tell us more about stocks. In case you were stuck and didn’t fully understand what stocks entail, now you have a better understanding. You will come across numerous terms when you decide to engage in stocks. Do not let the terms scare you; they are mostly things you knew, but just didn’t know that they go by those terms. We have many people who are quite investing in stocks, just because they could not understand the various terms being used. This should not be the case. You can take some time to go through the terms and understand what they entail carefully.
Options In Stock Market
Stock options are not as hard as people make them appear. At times people try to make them seem difficult, yet it is an easy thing that can be grasped by almost everyone. As a beginner, do not be discouraged into thinking that options trading is a difficult investment. You will be surprised how easy it is, and you will wonder why you never invested in it sooner. When engaging in stock options, there are four factors the investors will have to consider. Putting these factors into consideration will have a positive impact on their trade.
The Right, But Not The Obligation
What comes in your mind when you read this statement? Well, when we talk or rights, we mean that you have the freedom to purchase a certain type of option. When we talk of obligation, we are referring to the fact that one does not have a legal authority to exercise a duty. Options do not give traders a legal authority to carry out a duty. This means that there is freedom to trade, but it is not legally mandated.
Buying Or Selling
As a trader, you are given the right to purchase or trade an option. There are two types of stock that one can choose from. We have the put option and the call option. Both differ and have their pros and cons. If you intend trading in options, it is important that you equip yourself with adequate knowledge before trading or purchasing stocks. This information will have an impact on your expected income. The stocks you choose to buy, or sell will dictate if you will earn high returns or if you will end up making a loss.
Set Price
There is a certain price that has been set to exercise the option. The price will vary depending on the option type. Some stock options tend to be valued more than other options. There are some factors that will influence the price of options.
Expiry Date
The expiry date is when a contract will be considered useless. Stock options have an expiry date. The date is set to determine the value of an option. Any period before the expiration date, a contact is regarded as being valid. This means that it can be utilized to generate income at any point before the expiry date. When it gets to the expiry date, a trader has no power to exercise the option. This is as a result of the contract being regarded as worthless. As an investor, it is good to constantly ensure that your investment is within the duration of its validity.