Important Option Trading Fundamentals You Should Know 

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Options trading—according to renowned traders—depends on customization. Of course, there are high rewards. However, risks can pin you down. So, should you invest in options trading? Yes, of course. Many have made a fortune from options trading. Equally, many have recorded huge losses. So, what does this mean? It means you must get it right. And the only way to get it right is to master the strategies. Employ the right tactics. Don’t make costly mistakes. Master the option trading dynamics. Know the best trading options. With that in mind, the following overview will walk you through the jargon, take you to the core, and propel you to the winning stardom. Keep reading. 

The DIY investor

Normally, options traders tend to be self-driven directors. What this means is that they don’t depend on financial advisors to manage their trading portfolios. So, you too can DIY invest in trading options. With DIY trading, you have complete control of trading decisions as well as transactions. However, this doesn’t mean that you are a lone ranger. You can leverage online communities to interact with different traders. With online communities, you have tools that can update you on things like the current market outlook as well as the best option market trading strategies. 

Stock Options Is the Best Place to Start From       

New to trading options? Kick start your journey those options that are based on equities—also referred to as stock options.  These can be nice leads to those who are new to options trading. It’s also important to note that the NYSE lists stock options as quotes. Thus, it’s important to understand everything in that stock options quote before making an investment move. For instance, it’s worth knowing important details such as the cost as well as the expiry date. 

Here is how stock options are quoted on NYSE. 

XYZ NOVEMBER 17, 2017 80 CALL AT $4.10

  • XYZ—the option is based on this stock. Normally, it represents 100 shares. 
  • NOVEMBER 18, 2017—this represents the date in which the option is set to expire. Normally, the last date preceded the trade is fixed on the 3rd Friday of the month. 
  • 80—this represents the strike price for that stock. This means that the stock should change hands at a price of $80—provided that the option has been exercised. 
  • $4.10—this represents the premium (also known as per-share cost) of this option. Thus, you will be subjected to option contractors which represent 100 shares (i.e. of the underlying stock). It, therefore, goes that you will end up paying $410 in addition to the contract commission ($4.10×100=$4.10). In the stock options quotes, you will get everything concerning the compact form. Knowing the meaning of each segment will help you understand the contact option. 

Types of Options

Options represent a contract that gives you the right to purchase or sell trades for a certain period of time. Depending on that contract, the period can stretch from one day to several years. Standard option contracts are divided into two main parts: 

  • Call option
  • Put option

Call Option

A call option-based contract gives you the absolute right to buy 100 shares against specific security at a certain price within an explicit period of time. 

Put Option

On the other hand, a put option-based contact gives you the absolute right to selling 100 shares of a certain security at a certain price within a specific time frame. 

Note: both contracts doesn’t oblige you to exercise your right to buy or even sell. 

It’s important to note that for both types of options contracts— a call or put— the owner is not obligated to exercise his or her right to buy or sell. 

Options Trade on Securities

You can use options in different ways. The two major ways you can use options include:

  • Speculative purposes
  • Reducing risk

With trades, you can play the speculative game or reduce risks on the underlying securities. Common underlying securities include Equities, Indexes, and ETFs (an abbreviation for Exchange Traded Funds). Also, it’s important to note that options of indexes differ from those of ETFs. So, it’s vital to familiarize yourself with these differences. 

Calculating Risks Will Determine the Success of Your Options Trading Strategy

Stock trading is a game of numbers. Plus, options trading is all about volatility and risk-taking. Thus, calculating risks is important. You should familiarize yourself on how to calculate both historical and implied volatility. 

Essentially, historical volatility is a representation of the pasts and the day-to-day price fluctuations. This is measured over a period of one year. On the other hand, implied volatility tries to establish what the market implies as far as the future prices of the stock are concerned. This is measured based on one option contract. 

The Language         

With options trading, you have the power to purchase a call. Alternatively, you can sell a put. It’s also important to note that both options don’t rely on height. They can only be short or long. Thus, you have three options:

  • Be in-the 
  • Be at-the
  • Be out-the money

So, before you embark on your options trading journey, it’s better to familiarize yourself with these terminologies. 

Learn From the Greeks

As an options trader, you need to know how to use the Greek Alphabet when referencing the behavior of options trade on the market. This will help you roll out the best reading strategy—a key step towards a successful options trading experience. Learn how to use common references such as Delta, Gamma, as well as Theta.

The Bottom-Line

It’s time to take your trading options to the next level. Many have made it here. So, you too can do it. The trick lies in mastering the strategies plus other important details. The above information contains all you should know to option trade like a pro. From understanding the option trading quote to learning from the Greeks—this information will propel your options trading game to another new level

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