SHARETIPSINFO >> Articles Directory >>The ABCs Of Stock Options – understand stock option trading funda
Stock option is a type of derivative that is traded at the stocks market. Stock option is one of the two most popular forms of derivative instruments, the other being the Future. In derivative trading the traders invests in the stocks but not in the form of individual stocks. In derivative trading the stocks are traded in a lot and the contracts are traded instead of the stocks. The biggest advantage of the derivative trading is the facility of margin trading and the leverage. That means you can trade in the derivative segment for much more amount than your actual deposit in the fund.
In derivative trading that is in Future and Options trading contracts are traded between the buyers and sellers in the form of a lot. These contracts are traded at the derivative market amongst the buyers and sellers. The price of the lot is determined by multiplying the number of stocks in the lot with the current price of the stock in the market. But as you are trading at the derivative segment you need not pay the same amount and you can buy the Option contract by investing only a portion of the lot.
The Option contract is an agreement between the buyer and the seller for one or more than one lot of the stock. The contract is made with fixed price and a predefined date. The option contract needs to be traded in the fixed rate and the contact is settled on that fixed date. Once the contract is bought till the date of settlement the price of the contract is determined by the day to day movement of the stock at the stock market. Based on that price you can also close the position before the settlement date but whatever is the situation the contract will be settled on the fixed date when the contract will expire. But in option contact you can ignore the buying option but if you execute the buying option the seller is bound to sell the contract.
This is the basic of the option trading. The biggest advantage of option trading or as a matter fact derivative trading is the benefit of the margin trading. It lets you trade for a bigger value of stock while investing a much lower amount. For example you have 10,000 rupees at your account, you can trade at the derivative market for about 10 times of your total deposit. So you can actually trade for a contract of 100000 value with that deposit. This is undoubtedly a good opportunity for the investors as they can get the profit from a trade of option contract of much higher value than their investment.
But while taking this leverage you need to take the trading decision very carefully. You need to remember that like the same way in which you can earn good profit from the margin trading of the options, you can also suffer huge loss if your speculations get wrong. And if your speculations get wrong you will suffer huge losses as the trading will be done on the amount that is much higher than your deposit.
Another advantage of the option trading is that you will be paying much lower brokerage if compared with the trading of the same value at the cash segment. This will also let you trade at the derivative market with much ease and make more profit.
But like the advantage there is a disadvantage of option trading as well. The biggest disadvantage of stock option trading is that you are abided by the time frame for closing the position. So even if you are to suffer loss you can not ignore the fixed date for closing the option contract once executed.
So to take advantage of the option trading and make good profit at the derivative segment it is important that you take proper trading decisions. Before investing in the option contract you need to carefully study the prospect of the stock in which you are investing. The result of the stock at the derivative market, price movement, number of traded contract all these indicators should be studied before you actually invest in the stock options if you really want to gain from the derivative market.
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