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Stock Market Trading:
Options General
Option use is the best when the
volatility is at high levels and the stop loss point on a particular stock
is about the same price as the cost of an option. Also time spreads are also
the highest as volatility increases the option premiums. "Call options"
is a contract giving the holder the right to buy 100 shares of the underlying
stock within a certain time frame. The concept is like leasing a car. You
have the right to buy this car at the end of the term but instead of paying
the whole premium up front like in buying options, you pay it to the financing
company by monthly installments. Your lease expires at the end of the term
and just like an option, you may exercise it, (buy the car or buy the stock),
or just let it expire, (give back the car or do nothing on the options side.)
It is that simple."Put options" are the opposite as it gives you the right
to sell 100 shares of the underlying stock also within a certain time frame
and at a certain price. If the stock falls below this price, (called "strike
price"), you will be guaranteed to sell at your strike price. Obviously the
shorter the time you buy for protection, the cheaper you pay. A one month
premium is less expensive than two months and so on. Theoretically, if you
want downside protection for an infinite time period, then the premium will
equal the price of the stock.
Both these definitions are for buying puts and calls as the buyer has the
right to exercise or sell their puts at any time prior to the options expiration,
(the period one has purchased for.) Please remember that a buyer has
the right while a seller is obligated as this is a very important distinction.
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