What Is Option Trading?

Option trading is a very complex financial dealing field that can seem exciting and worthy of high, quick profits. Many things need to be taken into consideration before partaking in this risky area, however. Option trading is not always based on stocks. An option is defined as a derivative financial instrument that involves a specific contract between two parties. Options involve future transactions. The option is itself is usually attached to an underlying financial asset. The option involves a future transaction affecting a specific asset with a set price, known as a strike, price. Whenever you see the word "future" in a transaction description, think of an option. An option can be exercised, or acted upon, when the strike price is satisfied.

Option prices are determined in part by the difference between the strike price and value of the option's underlying asset. In addition, premiums are added to the option price to properly compensate the seller. Premiums are typically based on how much time is left before the option expires, known as the expiration date. Any type of valuable asset can have an option created for it. An option transaction always involves a buyer and a seller, as with any contract. The option gives the buyer the right to purchase the instrument. The buyer is under no obligation to purchase the option. The option seller, however, incurs a legal obligation to fulfill their end of the transaction.

One type of trading option is known as over-the-counter, or OTC. These options are not listed on any options exchange since they are privately traded between two parties. One party is usually well-capitalized, as in an investment bank. These options are not regulated. Terms are unrestricted and up to the individual parties to serve specific purposes. Common OTC options include swaps, currency cross rates and interest rate instruments.

Another type of trading option is listed on any number of options exchanges, generally known as futures and options exchanges. Hence, these options are known as listed options. Instead of private parties handling the details, trading houses handle the transactions. And, all options must be settled via the clearing house. The trading exchange uses its credit worthiness to guarantee that options are fulfilled. Examples of these options include standardized contracts involving bonds, stocks, any futures contract, stock market indexes and callable contracts.

Employee stock options are another form of options that, depending upon the terms, can be traded. These options are usually awarded by the firm as an incentive, or employee benefit. Usually firms owning the asset handle the options trading, with the approval of the employee involved. Four types of options trading exist. They are a long call, long put, short call and short put. All involve extensive details that depend on what the trader believes will happen to the stock price. For instance, a long call gives the trader the right to purchase the stock, known as a call option, when they believe the price is going up.

Option trading can be very risky, if you do not know what you are doing, since they are so speculative in nature. All facets of an option change throughout the exchange day. A premium in place when you purchase an option may change by the time you sell the option, for instance. Or, the underlying financial asset may change for any number of reasons. Making money from option trading is not easy but with the right training and the right knowledge, option trading can be highly profitable with a high winning probability ratio.

Daily Market Insights is a website that is created to provide traders around the world technical ability to make informed decision when trading the stock market . It is truly a site designed for traders to achieve maximum trading profit. The question "How to Make Money in the Stock Market?" and "How to Invest in The Stock Market?" has been answered. http://www.dailymarketinsight.com

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