In your journey to creating a nest egg for your sunset years, you must have come across hordes of investment opportunities. Some of them you have considered viable while others you quickly crossed off your list. Naturally, you want an investment plan that fits in with your needs.
You may have dabbled in the stock exchange before or considered other investment plans. In fact, you most likely know a thing or two about various types and aspects of securities. However, if you are just beginning your investment journey, reading up on investment options is crucial.
The search for the best investment option may have led you to a plan known as options trading. Why should you consider this particular vehicle? What is an option?
An option is defined as a contract that allows you to purchase or sell an underlying asset such as a security. This asset is sold at a set price and must be disposed of on or before a set date. This transaction is conducted at an options market. Contracts are traded based on securities.
Options Are Risk-Reducing Tools
When you use options properly, you are able to cut down on risks. In the same breath, you improve your chances of making profits from your investment in the stock market. It is therefore imperative that you fully grasp the basic principles that govern options trading.
What You Need To Know
This information is important for anyone that wants to try out options trading:
- An option is a contract between a buyer and a seller.
- Options are divided into two categories: calls and puts.
- As the option buyer, you must pay the seller a premium.
- Once the seller receives the premium, they give you specific rights and agree to specific obligations.
- Call Option: the owner of the option has the right to buy a contract. A contract is a specific item which is bought at a specific time and at a specified price (known as a strike price). The transaction comes with a deadline.
- Put Option: the owner of the put option has the right to sell the contract at the strike price on or before a set date.
- Every contract (underlying asset) represents a hundred shares of stock.
- An option seller may be expected to honour the conditions of the contract. The conditions are to either sell the stock to or buy the stock from the put owner. When the option expires, it becomes worthless (expires worthless). The seller is no longer under any obligation to honour the conditions of the contract.
- The option expiry date is the end of the limited time. That is the deadline or set date by which a contract should have been bought or sold.
The owner of the option has three options:
- Sell the option on the open market: This is pretty much the same way you would sell shares.
- Exercise the option: The call owner follows the dictates of the contract. The dictates are to buy a hundred shares of the stock at the specified price. This is allowed as long as the contract has not expired worthless.
The put owner is allowed to sell a hundred shares of the stock at a specified price (strike price).
The preferred option is option one; sell the option.
- Let it expire worthless: Allow the option expiry date to arrive.
What is the Difference between Options and Stocks?
Options are not synonymous with stocks. Stocks allow you to own a company. Options, on the other hand, come with a time restriction. They are contracts that represent a hundred shares for every contract.
Options prices are also different from share ones. With options, pricing will depend on supply and demand. When the market is turbulent, the prices go up and when it is calm, the prices fall.
It is important to understand what options entail so that you can make an informed decision before you take the leap. Investments are great ways of growing your wealth. However, one must do their homework before choosing an investment option.