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Trading Stock Options – The Basics

Trading Stock Options

Trading stock options, Wall Street or Greed Street U

The Stock Market is still a very profitable portal even in this stage of our economy. Although trading stocks generally means taking a risk on a company in hopes that it prevails and the stock value increases, trading stock options can be profitable even if the company doesn’t prevail.

Here are a few basic things to know about trading stock options

Option Basics

All trading stock options are simply rights. They are the right to buy or sell a certain number of shares by a certain time for a certain price. These terms are outlined in a contract that a broker and a trader must execute together.

There are call options and put options. Call options are a contract to purchase 100 shares of a stock before an expiration date. A put option allows trading or selling of these shares or contracts in an agreed amount prior to expiration. When a trader opts to use both call and put options this is called a double option. Because no one can guarantee if the share price will go up or down by the expiration date, it gives the trader great leeway to trade the stocks as he wishes.

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Trading Stock Options

A strike price is listed in the contract. This is the amount that the trader has agreed to pay at the expiration date. This price is much lower than the actual price of 100 shares because of the leverage a stock option possesses. A trader has until the expiration date to either purchase the shares or sell them. This is not to be confused with the premium. A premium is the amount that the trader must pay for the option itself. This is typically paid upfront and nonrefundable. If a trader decides to exercise his option that means he chooses to buy the underlying stock for which the option was created for.

Option Trading Exchanges

Trading stock options do not occur in the same exchanges as trading stock. Trading stock takes place in 3 exchanges, and trading options occurs in 5 exchanges, different than the 3 stock exchanges. You can find the same stock option in all 5 of the exchanges but you can only find a stock listed in one of it’s 3 exchanges.

Trading stock options isn’t an obligation, it’s a right. You can choose to do a number of things with the contract. The security of this transaction comes from the underlying price. Even if the share’s value decreases, a stock option trader can still profit.


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The Difference Between Trading Stocks and Trading Stock Options

Stock Option Trading Strategy and Daytrading Stock Options

The Difference Between Trading Stocks and Options

Trading stocks, NYSE Trading floor

Trading stocks, NYSE Trading floor

 The Difference Between Trading Stocks and Options

Trading stocks in the  stock market doesn’t completely revolve around just buying and selling shares like a day trader or long-term investor. Yes, purchasing stocks allows a buyer to own a piece of a company and if the company does well it’s stock’s value increases or if the company suffers, the stock’s value decreases. The goal is to buy stock at a low price in a company with a promising future then sell when the company reaches a peak. This is how one can maximize profit by trading stocks however there is another important alternative called stock options. Trading stock options involves a contract which allows a trader to buy or sell the stock at a determined price by a certain deadline.

Trading Stocks

Trading stocks can be more risky than trading stock options because, with stocks, it is possible to lose everything (think Worldcom or Enron) but if you are trading options downside is limited to the cost of the option which is a fraction of what the cost of holding the stock is.  Each stock option is the equivalent of controlling 100 shares so the risk exposure is limited to the cost of the option’s premium versus the total cash outlay for owning 100 shares outright.

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Trading Stocks Online

Trading stock options is more complex than trading stocks but can be overcome with a little bit of education. With trading stocks you have to pay close attention to the stock’s price action and earnings history plus a little bit of understanding of the company you are about to invest in. You do this in hopes that the company prospers and the value of your stock increases. With trading options there is an additional step not required of stocks. A broker has an application form which they must have the potential option trader complete. This form shows the experience and understanding the potential trader has, and the broker is to use that information to appropriately guide them. If a broker allows an inexperienced trader to trade on a level not suited for them and that trader loses a substantial amount of money, the broker can be held accountable.

Stock Trading

Stock trading and options trading occurs within different exchanges. Trading stocks online takes place in the Nasdaq

Mike trading stocks on the Hong Kong Exchange

Mike trading stocks on the Hong Kong Exchange

Stock Market, the New York Stock Exchange or the American Stock Exchange. Trading stock options occurs on 5 exchanges, Chicago Board Options Exchange, the American Stock Exchange, International Securities Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange. A stock can only be listed in one of the three of it’s exchange but an option can be listed in all 5 of it’s exchanges.

Trading stocks is the traditional, well known way to deal within the stock market. Another way to potentially profit is by trading stock options. Now that you know the difference between them, perhaps you know which one you’d like to pursue.



online stock trading

Trading Stock Options – The Basics

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Benefit From Any Stock Market By Trading Stock Options

Want to get involved with the stock market but want a less risky route? Want to invest in stock but don’t want to lose the little you have to invest? Want a more secure path to making money online? Instead of buying and selling stocks, try trading stock options. It’s a safer and more secure method to approaching the ever complex stock exchange market. You can make money trading stock options by understanding the following.

There are two kinds of stock options, one is the call option and the other is put option. A call option is bought and the put option is sold all to make money trading stock options. Whatever one person gains is a direct result of another person losing. The amount won is the amount lost. The odds are better than trading stocks. Stock options are a more precise type of trading with predictability, control and little upfront investment.

One intricate, but protective measure you must be very aware of is the contract. Unlike buying and selling stocks, an option trade requires a contract. The terms of the contract must be met. From the deadline given to the price granted, you must be very aware of what you have agreed to in order to profit. Once you have entered this contract you are able to buy or sell as you need. Once a trader gains experience they will learn the dos and don’ts of this type of trading and be able to profit greatly in short periods of time.

Trading stock options allows you to get your hands on stock for just pennies to the dollar. Because of leverage that options possess, a trader can make just as much money or more money than a person who purchases stock. The leverage is the basis of the option trading systems.

Instead of just guessing or hoping that the stock you choose will bring you profit based on your personal analysis and wishful thinking, trading stock options allows knowledge and experience to work together. Option trading strategy and the ability to predict the market can be taught through training and education. An investor can gain understanding of the financial market and use this to successfully trade stock options.

Trading stock options allows one more flexibility. Many people, once they understand the process of the stock market, generate significant income. It allows a trader to benefit from a stock regardless if the market is improving or failing. The rules to this type of game are primarily outlined in the contract but the way to play the game is something that is learned over time.

There are Many Different Types of Investors in Trading Stock Options

It is fair to say that all investments in the trading markets involved some type of risk, some more than others. However, when trading stock options, the risks can be far more than a normal stock transaction. Does that mean that only those with deep pockets should venture into options trading? That is a question well worth asking, and the answer might surprise you.

If you have the stomach to handle the risks involved trading stock options, however you do not have the financial resources of a wealthy investor you to can still make money trading stock options. In many cases, an investor can open up an options trading account with as little as $80.

If you want to make money trading stock options, it is important to understand what kind of investor operates in stock option trading and what are some of the option trading strategies that are used. This will be your first step in learning how to trade stock options.

In option trading you might hear the term risk capital. This term is normally used when referring to those deep pocketed investors. Risk capital is a term for money an that can be lost without affecting an investor’s financial status. As stated earlier, wealthy investors will take some rather risky chances with that type of capital and since there is no negative repercussions if that money is lost there is no harm and no foul.

As an investor of any financial station, if you want to make money trading stock options, stock option trading offers many different paths to success and various option trading systems to adhere to. Therefore, investors with limited funds like a slower and more steady approach tend to deal in smaller, less leveraged and far less risky option trades. They do this in order to slowly build up there funds to the point to where they can deal in larger options without the fear of losing every dime they have and a few dimes that they do not have. The other side of trading stock options is the investor with virtually unlimited capital. These investors will take some chances with their money in order to cash in on that big, lucrative option deal.

Understanding Important Terms When Trading Stock Options

In the world of trading, few things hold the possibility of tremendous financial rewards more than trading stock options. There are many reasons why this sort of trading is so popular and profitable. However, one particular reason why people make money trading stock options is that a skilled investor in stock option trading will incorporate his or her knowledge of options into a wise option trading strategy. To be successful in any of the many option trading strategies an investor must know what exactly an option is.

There are often times many technical descriptions of trading stock options and this form of trading does have many complicated aspects. However, options trading can be easily explained as a contract that gives the investor the right but not the obligation to buy or sell stock. To obtain an options contract an investor must purchase it. This contract to buy or sell stock may hold more value in stock than the buyer of the option may actually have. This is where the possibility of massive profits comes in. Conversely, it is also, where the possibility of tremendous loss arises as well. For this reason, while people can make money trading stock options, it is considered a risk filled form of trading and is certain not for everyone, especially those who do not have risk capital that they cannot afford to lose.

When an investor learns how to trade stock options, he or she will become familiar with two specific terms inherent to stock options trading and understanding these terms is key to a successful options trading strategy. The first term is a Call Option. This, in laymen’s terms gives the owner of the options contract the right but not the obligation to purchase a quantity of stock in a timeframe spelled out in the contract.

Another term in trading stock options is a Put Option. This gives the options holder the right but not the obligation to sell a specified quantity of stock in a period determined by the option contract.

This is where the potential of profit arises. With a Call option, a buyer can set a price for the stock they want to purchase in an option contract. If the stock they option to purchase goes up in value, they can still exercise their option at the lower price, thus getting expensive stock at a lower price. This is also the case with a Put Option, If the stock you wish to sell goes lower than the preset price in the option contract the seller can still sell the stock for the higher price, therefore a profit can be made. However, with options trading, if you guess wrong on a stocks value, you could end up losing a ton of money.

Make Money Trading Stock Options by Understanding Moneyness

In any kind of business that involves stocks, there is always some form of risk that you have to take in order to make money. There are many risks in trading stock options simply for the fact that the contract of the option trading could expire before you would make your money trading stock options. Many people take the risks of options trading due to the fact that stock option trading is the one way that they make money trading stock options. You have heard the saying that “you win some, you lose some” and this is the saying you have to live by within the option trading systems.

The most important concept in trading stock options is the options moneyness which is the relationship between the strike price and the underlying asset’s price. This relationship determines if the intrinsic value is within the option. The options moneyness within trading stock options is determined within three different states which include ITM or in the money, ATM or at the money, and OTM or out of the money. Knowing about options trading depends on these stock option trading aspects and understanding how they work in order to make money trading stock options.

When it comes to the underlying asset, when this asset’s price changes, it will change the aspects of options trading withing the three states of moneyness which will in turn affect how much value your trading stock options become before the expiration of the contracts. To know how to trade stock options can get very confusing and learning options trading will make all the difference in whether you make money at it or whether you just decide that it is not your game to play. You should learn by other option trading strategies that people making money are using and put your own little spin to them.

When learning to become an options trader, you have to be very knowledgeable in trading stock options and the option trading systems. It is very important to understand the three states of moneyness because this is the jargon that is mostly used in the option trading community. This knowledge will directly impact the profit that you would be able to make with your option trading strategy. The key factor in order to make money trading stock options is basically to research and learn as much as you can about every factor that is involved.

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