How To Trade Options : Getting Started With Options Trading
Thursday, January 28th, 2010For learning how to trade options, first you need to know basics of options trading.The contract between a buyer and a seller which gives the buyer the right to buy and sell a particular asset before the time expires at a predefined price is known as option. In return for granting the option the seller collects the payment from the buyer. The call and put option define the following for the buyer and the seller, the buyer can the asset in a call option and the seller can sell in a put option. If the seller chooses to use his rights after the receipt of the call option the buyer has to sell the underlined asset at a pre agreed price.
The buyer has the right to choose if he wants to exercise his rights or allow it to expire in which he can take over the asset which can be a security, derivative instrument or futures contract.
To evaluate the value of an option there are several models available. Qualitative analysis has helped in the development of the model which can evaluate the value of an option under changing circumstances. Risk of association with granting or trading options can be quantified and managed with a great degree of accuracy.Exchange trade options form an important part of options those that have standardised contract feature trade on public exchanges and facilitate trade among the independent parties. When the trade takes place between two private parties or well capitalised institutions over the counter separate trading and clearing arrangement needs to be made.
The option which is highly practised in the US is called employees stock option. This option is given to the employees as an incentive towards the hard work done in the organisation. Financial contracts withhold many options like the real estate option which is used top assemble large parcels of land prepayment option which are used in mortgage loans.
The two parties agree the terms and conditions on the term sheet and each financial option is considered as an option. It says
1. It would state if the option holder has the right to buy call option or sell put option
2. The asset class and quality would be mentioned.
3. The transaction and the price of it will be mentioned.
4. The date on which the option expires will be mentioned.
There is a risk of securities changing value over a period of time. Unlike traditional securities the return from holding varies none linearly with the value of the underlying factors return from holding varies