Buying and Selling Stock Options
The financial contract for call options involves the fact that the buyer of the options has the right to buy a particular asset (underlying) from the seller at a certain date and for a certain price (the strike price). However, this is not an obligation. The buyer pays a certain amount of money called premium for this right and in case he or she decides to buy, the seller has to sell at the agreed-upon strike price. Otherwise, the seller keeps the premium.
Can I Trade Options?
Before trading options you need to clearly understand what you are doing and the risks involved. You have to be aware that if the buyer makes profit, the seller loses money and vice versa. The risk is lower for the buyer because he or she can’t lose more than the premium. You have to make the difference between American and European options. The American ones can be traded at any point before they expire, while European option can only be traded at the expiration date. Learning how to buy stock options is different then simply Trading options is either done on a public stock exchange or Over the Counter, between two parties that made an implicit agreement.
Selling Put Options
Each time someone sells an option there is a reason for doing this and the seller is expecting to somehow make some money out of this. The buyer of puts pays a premium in order to hold the right to buy that stock in a period of time and at a certain price. No matter what happens, the seller is obliged to sell at that price if the buyer asks for this. However, the seller keeps the premium if the buyer doesn’t exercise his right. In other words, an investor will choose to sell puts if a rise in price is anticipated, in order for him or her to gain the premium because the buyer won’t buy as long as the price will keep above the strike price.
The important thing you have to keep in mind when using options to buy stocks is that you don’t trade the actual stock, but a right. However, the options are not worth trading if the stock itself is not trustable. The advantages of stock options versus long term stock investments is that the risk is lower and the money you need for the initial investment is less.
To learn more about how to buy stock options visit the website dedicated to stock market information.
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