'z Options Trading: A guide for amateur traders - Article Catalog

Article published by : Alex Smith on Friday, October 30, 2015 - Viewed 1080 times

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Category : Investing

Options Trading: A guide for amateur traders



Options trading is no rocket science. To simplify what options actually are, let us take real life examples: in life at every point we have a certain number of options to avail, each option has a cost associated with it and the worth of each option is valid for that time only, once past that time, its foregone. Similarly, in the world of financial derivatives, options are contracts available for the traders to minimize the risk involved, the buyer of the options contract pays a premium to avail the option and every option has a maturity date post which it becomes worthless. Options act as a protection shield against the uncertainties, hence it helps mitigate risks by making use of a certain options strategy depending on the amount of risk the investor is willing to take, the corresponding expected return and the current market condition.

It was introduced in USA in 1973 by the Chicago board of exchange for the very first time, however in India it came into practice only in the year 2002. Options are contracts which give the right, but not an obligation, to buy or sell an asset at a mutually agreed upon price before a specified period of time. The option to buy is called a call option and the option to sell is called a put option. There are two main styles of options contract:

1) American Style: The options contract according to this style can be exercised any time before the expiration date

2) European Style: When an option can only be exercised on the maturity date, then it is the European style of options contract

The buyer of the call option pays the exercise price at the time of exercising the option and pays the premium at the time of purchase which is an income for the seller of the option. There are three different possibilities in which an option holder can exercise his right:

1) In-the-money: When it is advantageous for the investor to exercise it

2) Out-of-the-money: When it is not advantageous for the investor to exercise it.

3) At-the-money: It is breakeven, when the investor does not gain or lose irrespective of exercising the contract

Trading in options can prove to be very beneficial if a proper options strategy is implemented and it involves low risk as compared to stock trading. There are a range of sources and tutorials that help you understand about these concepts properly.

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Keywords: Options Trading Tutorial, Options Strategy, Options Training

By: Alex Smith

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Article ID 1020739 (Views 1080)



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