In fact, you probably have purchased the right to protect yourself against risk in some area of your life, such as home, health or car insurance. Those same principles can be applied to options trading. You purchase a new car after trade time to decide which model you want based on safety ratings, how smooth the ride feels and how well it will accommodate your needs.
But would you drive that shiny how car off the lot without trade precautions in the event that something happens to your investment? Probably not and not just because car insurance is required by law. Options pricing will be covered in more detail a bit later. There are two basic types of options: Every options strategy, no matter how complex, uses one or both of these option types as its building blocks.
Call options are derivatives that give the buyer the right, but not the obligation, to buy a security i. Put buying is similar in theory to shorting stock because the trader is motivated by expectations that the shares will fall below a certain price. The put buyer actually incurs less risk than option short trade, however, because the maximum potential loss when buying options is the premium paid to enter the trade.
For all options, there are always two parties involved — someone buying and trade selling. There are also pros and cons for each strategy. The key to successful options trading is determining which choice is right for you at which time. When you trade an option, you are actually buying or selling an options contract. One options contract controls shares of the underlying stock. The variables behind option pricing will be discussed later.
Each options contract controls shares of stock, so when you hear people talk about one contract, they option effectively talking about shares. Two contracts would how the equivalent of shares, five contracts would be shares, and so on. Financial Market Data powered by FinancialContent Services, Inc. Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes. Breaking news sponsored by googletag. How to Trade Options How 12,2: Article printed from InvestorPlace Media, http: More on InvestorPlace What Does Amazon Get With Whole Foods?
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