Option trading provides many advantages over other investment vehicles. Leverage, limited risk, insurance, profiting in bear markets, each way betting or market going nowhere are only a few. But let's look at a couple: Leverage One thing to note tricks we go on is that the buyer of an options contract pays an amount, known as the premium, to the option seller. An option seller is also known as the writer of the option. The option premium is simply the amount paid for the option - but there is more about this under the Pricing link. When you buy an option contract from an option seller, you aren't actually buying anything - no asset is actually transferred until the buyer chooses to exercise. It is just an agreement where the buyer has the option to decide if the transfer is to take place. But the option contracts value is determined by the underlying asset - Microsoft Shares as an example. Options give the buyer the right to buy a number of shares of the underlying instrument from the option seller. The amount of shares or futures contracts to buy is determined by. The contract multiplier also called contract size is different for most classes of options and is determined by each exchange. In the US, the contract size for options on shares is This means that every 1 option contract gives buyer the right to buy shares from the option seller. So, if you buy 10 IBM option contracts, tricks means that you have the right to buy 1, Tricks shares at expiration if the price is right 10 x In other countries such as Australia, the contract multiplier for stock options is 1, which means the every option contract you buy entitles you to 1, underlying share contracts. So pay attention to the contract specs before you begin option trading. This also means that the price of the option is also multiplied by the contract multiplier. This is a crucial concept to understand. So, even though the shares only went up 3. Penny Stocks are companies that have very low share prices. You can buy some stocks for as little as 10c. For this reason penny stock trading is becoming very lucrative for online speculators. They can still trade the stocks outright as well as making massive returns if they are correct about their view on market direction. The only drawback with penny stocks is trying to pick which stocks to buy. I'm not that familiar with trading penny stocks, however, I know of a great site that provides stock picks for penny stocks every two weeks. They have a free trial, so you can see for yourself whether penny stock trading is for you or not. Penny stocks can be risky though - there's a reason why they're so cheap, nobody wants them! So, be careful to act on the right information. Limited Risk One of the biggest advantages option trading has over outright stock trading is to be able to take a view on market direction with limited risk while at the same time having unlimited profit potential. This is because option buyers have the right, not the obligation, to exercise the contract option the underlying at the exercise price. Let me give you an illustration. Remember our initial example of Peter buying a Microsoft Call option? Here are the details of that trade provided with the appropriate jargon; Underlying: This means we must consider this in our profit estimate. Therefore we trading the option premium to the trading price to determine our break even point. If we exercise our right and take delivery of the shares, this means that we will have to pay the full amount for the shares. So, the number of option contracts bought multiplied by the contract size multiplied by the exercise price. If you are planning to hold onto option contracts until expiry and take delivery, make sure you have option cash! Remember the premium we paid? We have to consider that with our profit estimate. Think about what happens as the underlying price continues to rise. You continue to make more and more money once the stock price has exceeded the strike price. But what about the downside risk? So, we will just do nothing and let the option contract expire worthless. What have we lost though? A lot less than if the stock plummeted and we lost our entire investment. Limited Risk AND Unlimited Profit Potential Can you see now how this type of strategy gives you the best of both worlds - both limiting your risk and at the same time leaving you open to make unlimited profit if the market rallies? Not all option strategies have this payoff benefit. Only if you are buying options can you limit your risk. For option sellers, this is the reverse - they have unlimited risk with limited profit potential. So, why would anybody want to sell options? Because options are a decaying asset, which you can read more about under the Time Decay section. Tuesday, July 29, Why Trade Options? The amount of shares or futures contracts to buy is determined by; The number of option contracts, multiplied by The contract multiplier The contract multiplier also called contract size is different for most classes of options and is determined by each exchange. It is called an option because the buyer is trading obliged to carry out the transaction. There are two types of option contracts - Call options and Put options. A Call option gives the buyer the right to buy the underlying asset, while a Put option gives the buyer the right to sell the underlying asset. Peter buys a Call option contract from Sarah. This is the price at which the asset will be exchanged. The date in this case 5th May is known as the Expiry or Maturity Date. This date is option deadline for the option contract. At this date, the option buyer is to decide if a transaction of the underlying asset is to occur. In this situation, Peter would choose not to exercise his right to buy the shares and let the options contract expire worthless. His only loss would be the amount that he paid to Sarah when he bought the contract, which is called the Option Premium - more on that a little later. Sarah would, however, keep the option premium received from Peter as her profit. In the real world of exchange traded options, transactions don't really take place between two people like I've explained above. The process of Novation actually removes the identity of who is on the other side of the trade. You simply Buy or Sell an option contract from the exchange without knowing who is on the other side.
Binary Option Trading Tutorial IQ Option Idea and IQ Options Tricks
Binary Option Trading Tutorial IQ Option Idea and IQ Options Tricks
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