Option definition

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Option is basically an instrument that is traded at the derivative segment in stock market. Option is a contract between the buyer and seller to buy or sell a one or more lot of underlying asset at a fixed price on or before the expiry date of the contract.

While buying an option a contract the buyer has the right to exercise the option within the stipulated time period but he or she is not bound to exercise that option. On the other hand if the buyer is willing to exercise the option the seller is bound to honor that contract.

In option trading the price that is agreed up on for trading is called the strike price and the date on which the option contract is going to expire is called the expiration time or expiry. There can be different underlying assets for which options are traded including stocks, index, commodity, derivative instrument like the future contract and so on.

Call Option — When what does option trading means are buying a call option it will give you the right to buy the what does option trading means asset at the strike price within the stipulated time period.

The option what does option trading means, who is creating the call option, will have the obligation to sell the asset if you are willing to buy as per the contract. For buying the call option you will have to pay the premium price of the contract to the option writer. Put Option — A put option is the opposite of the call option. When you are buying a put option it will give what does option trading means the right to sell off the asset in the strike price on or before the expiry of the option contract.

While you will have the freedom to either honor the put option or ignore it, the seller of the put option will be legally bound to buy the put if you are willing to sell.

Trading in option contracts — For trading in the option contracts you have to pay the premium price to the writer of the option contract. Like in other forms of derivative trading in option trading as well you have to buy or sell the option contract for one or more lot.

A lot comprises a fixed number of underlying assets and the price of the lot is determined by calculating current valuation of the asset in the market and the number of units in the lot. From an investors point of view there are double folded benefit of option trading.

Firstly, the leverage of what does option trading means option trading that lets you control greater value of investment with significantly lower deposits. In option trading you need much lower deposits to trade in option trading than investing or buying the same quantity of asset outright.

Apart from leverage, the option trading has lower risk that investment in cash segment or trading in the future contracts. If you have a speculation that the price of particular what does option trading means is going to rise, you can buy the call option of that stock. If the stock rises to your expectation within the expiry date then you can always exercise that option contract to make your profit, else you can let the option expire worthless.

Even in that case you need not what does option trading means anything more than the premium of the option contract. On the opposite side if you think that price of a certain stock is going to fall, you can buy the put option instead of selling a future contract. In this case also you can make profit by exercising the put option within the period or let it expire without any action on your part. With so much advantage of the option it is strange that maximum traders make loss while trading in option contracts.

The major reason behind this is they end up buying really overpriced option contracts and most of these contracts expire worthless. So if you want to make sure that you make profit from option trading, you need to determine the fair value of the option before trading in that option. Click here for Indian stock market tips. For more details click here.

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Option trading is one of the fastest growing areas in the financial industry. The option exchanges have consistently reported record option trading activity year-after-year. Speculators leverage stock positions by trading options while investors hedge risk through option trading. When you purchase a call option on a stock you have the right to buy shares at a specified price the strike price within a specified period of time expiration date.

When you purchase a put option, you have the right to sell shares at a specified price the strike price within a specified period of time expiration date. The key concept is that you have the right, but not the obligation to take action.

Some options expire worthless while others are exercised. However, the vast majority of option contracts are traded. There is a pricing relationship between the stock and the option. Serious option trading requires real-time quotes and split second executions. They are available through most online brokerage firms. Longer-term option trading can be attempted using delayed quotes.

Options are a derivative of the underlying stock and the pricing concepts and strategies are complex. Before you attempt option trading, you should know option trading definitions. I divide them into 3 categories. Basic Option Trading Definitions - call, put, strike price, expiration date, exercise, assignment, contract, bid, ask, premium, intrinsic value, time decay.

Strategic Option Trading Definitions - long, short, premium buying, spread, debit spread, credit spread, margin requirement, breakeven, diagonal spread, condor, back spread, butterfly, naked, covered call, strangle, straddle. Advanced Option Trading Definitions - implied volatility, delta, gamma, vega, theta, rho, Black-Scholes pricing model.

Feel the power of my systematic approach as I find new stock option trades. Space is limited for this live online presentation. Option Trading Definition Option trading is one of the fastest growing areas in the financial industry. Option Strategies - Good and Bad! Is it a Waste of Time? Surrogate Market Positions - How and Why? How Does Assignment Work? Front Month or Back Month Options?

Free Option Trading Event Feel the power of my systematic approach as I find new stock option trades.