Options do not always have a good reputation because people view them as incredibly risky. This is true, they are extremely high-risk high reward tools for trading and speculating on the markets. All Option contracts work the same way; when you understand what a stock option is you will also understand how an option on a commodity works. Options come in two primary forms, Calls and Puts, and as most readers of this site are options in the stockmarket we will mainly be focusing on equity options. A ship can therefore get easily damaged if it sails too close to the berg even if the visible part of the ice is some distance away. But to have a proper grasp of how they really work you also have to delve below the surface. This means that you should not contemplate using options until you have a proper understanding of exactly how they work and their subtle nuances. Please don't forget this because a lot traded money continues to be lost by new option traders who dive into the deep end without the proper knowledge and experience. And knowledge in the markets always carries two advantages. Call options generally rise when the underlying asset rises in price. For example, Call options on Vodafone will generally increase when Vodafone rises in price. Without it the statement would say ' Call options in Vodafone increase when Vodafone rises in price ' but that would be wrong. There are times when the underlying share rises in price and the Call options decrease in price. Conversely there are times when Vodafone might decrease in price but the Call options increase in value. This can be due traded many factors but the main one relates to what is called option volatility. We've written a dedicated page as to what option volatility is, how it worksand why it is so important when trading options. Don't even think about trading them until you understand how volatility works and influences the price of all options. Put options generally rise in value when the underlying asset falls in price. For example, Put options on Sainsbury's will generally rise in value as Sainsbury's share price falls. And as with Call options the word ' generally ' is important and it's related to how volatility is used in the pricing of all option contracts. All options expire at some stage in the future, so they can only have value for a set period of time. They are therefore known as ' wasting assets ' because the price can decrease or waste away the closer it gets to its expiration date. This makes sense if you think about it. As indicated above an option only lasts for a set time period. But if the stock doesn't start climbing as the days tick by the chances of it rising by more than a certain percent start to diminish and hence the value of the option will decrease. But as the days drift by the chance of the stock rising significantly also diminish and therefore the price of the option declines over time. An option is always priced in points or as many refer to them, ticks. The point value is then multiplied by how many shares the option is on. Most London shares, unless they're of a very high value, are on 1, shares. But remember, equity options for shares traded in different options will be different. For example, in the US most options are on shares. Time value is the amount by which the premium price of an option exceeds its intrinsic value that is if it has any intrinsic value. There are also other phrases that are used to describe in-the-money and out-of-the-money options which are self-explanatory. An option gives the holder the right but not obligation to buy a set number of shares options a set price on or before a set period of time. Options are tradable financial products. Most of them are not used to actually convert into the underlying shares. Commissions aside, it doesn't matter which of the above you do, both will result in the same profit. This is why the phrase ' right but not obligation ' is important when defining options. Just because you might have a profitable option position you don't have the obligation to exercise the option into shares and hence generate the profit. Most options therefore are not exercised. Options are therefore flexible financial tools. When dealing in options there are two styles, European and US. Confusingly the terms have nothing to do options the different continents or shares and financial products listed on the two continents. Of course the option can still be freely traded in the market place enabling a profit or loss to be taken. All options on UK equities are US style and are therefore more flexible. Although they trade both the US and European style options on the FTSE index, most if not all of the business is done European style. Personally I wouldn't worry too much which style of options to use because for most retail clients it is immaterial. But if you have the choice it's simple to work out which style to use - always trade where the majority of trading is being done. For example, if you want to traded options on the FTSE index, both US and European style are offered. Look at the daily volumes and you'll see the vast majority are traded European style - that is therefore where you should trade. This options because the busier a market the tighter the bid offer spreads. You might find for example the spread on a FTSE Euro style option is whereas the same spread for the US style option is Never forget that the cost of doing business in the financial markets is so important to overall profitability. The more you pay in costs the less overall profit or more overall loss you will make. Some traders think of costs as a tax. And it's hard to find people who want to pay a higher tax percentage of their income! Shorting means profiting from declining prices, and it's a universal phrase in trading. Shorting RBS shares, shorting the dollar, shorting Gold is the same as shorting a BP call or put option. All of these trades will make money if the shorted product declines in price but will lose money if it rises. Note, that shorting shares in the UK is normally always done by using Contracts for Difference CFDs. Shorting options, for those that are not used to shorting in general, can be somewhat tricky to understand. But work at it because it's easy once traded get to grips with it. Understanding Shorting traded able to make money via falling prices. I often say that correctly understanding the concept of shorting is like learning to ride a bike. It takes time, but once you know how you'll never forget. You also can't kid yourself that you can ride a bike - you know if you can or can't. Likewise, when you understand shorting you'll know you understand it. Understanding how shorting works in options is important because many option strategies involve what are called spreads. A spread is where 1 or more option is bought and 1 or more option is simultaneously sold short. Options are discussed in more detail on the Options Strategy page. But with options you can also make money out of sideways movement. The shorter time they have to expiry the cheaper they become. Some traders therefore use options to take advantage of expected lacklustre trading. They do this by selling short Calls or Puts or a combination of the two. Important - Shorting is an excellent way to make money with options but it should never be done without. But not many people trade 1 option, normally they'll trade at least 5 and possibly up to 50 contracts. Do that sort of size, get the trade disastrously wrong, and options can easily blow your entire trading account - it's happened many times in the past, even to very experienced option traders. So I repeat - do not even consider shorting options when you are just starting out as you might open yourself up to the risk of potentially horrendous losses. Many people new to options believe they've found an almost perfect tool because the financial markets can be and are often extremely volatile. And highly volatile movements can if you get them wrong lead to nasty losses. But with options you theoretically have the best of both worlds. But at the same time they forget the Achilles heel of an option if bought - it's a wasting asset so will always expire at some date in the future. Traded it can lose all its value as the days tick down to expiry. And even a 1 day or even 1 week can be the difference between spectacular profits and zero gains. To have a good chance of making money in options, or correctly using them to reduce risk, I'm going to be brutally honest. And if you don't attempt to delve below the surface to explore option theory in more detail it's going to be extremely tough to show a profit over time. My advice is simple, use one of these two strategies to have a good chance of making money with options. For options you only need a solid understanding of their basics and fundamentals. Do this and you can add options to your financial toolbox. A handyman carries a bag of tools all designed options certain jobs. He'll use a chisel for wood and a wrench for plumbing etc. A good stockmarket operator should also have many tools at his disposal. He can use shares, CFDsspread bets and options. Given any type of trading situation one tool might be better than the other. For example, if he wants to use leverage and short profit from falling prices an individual share, CFDs traded Spread Bets would work well. For another trade idea options might be the best tool to use. But you've got to know how to correctly use them and which options to use. For example if it is the beginning of April and you're extremely bullish should the April, May, June or July calls be bought. You don't need to be an options boffin to carry out that sort of analysis but you need to have an excellent grasp of the basics. To summarise - If you plan to use options occasionally just learn the basics and don't worry too much about the really technical and mathematical side to their nature. You have to dive deep below the surface using the iceberg example to explore and understand the subtler and finer points of option theory. You also have to options heavily on computer power but it is unnecessary to have an expensive PC or software. How do you get this education? You can teach yourself, which will be difficult unless you're already mathematically gifted, or you can get somebody to teach you. Take his course sput in the real effort needed and there's no reason why you can't be pulling decent profits from the options market over the coming years. To Summarise - don't get heavily involved in options or option trading unless you're correctly trained and also are willing to devote a major part of your time to this issue. Options What are they - How they work. A call option gives the holder the right, but not the obligation, to buy a fixed number of shares of the underlying stock at a fixed price within a fixed period of time For example: A put option gives the holder the right, but not the obligation, to sell a fixed number of shares of the underlying stock at a fixed price within traded fixed period of time For example: You could either keep them or immediately sell them to bank a profit, or Sell the option and make the same profit as above. Understanding Shorting being able to make money via falling prices I often say that correctly understanding the concept of shorting is like learning to ride a bike. If you're bearish - You can buy puts OR you can sell short calls If you're bullish - You can buy calls OR short puts. Limited risk - can't lose more than you paid for the option, alongside Unlimited reward - an option can be bought for pennies and sold, if the market makes a large move for considerably more. Read more in the Options section: How options are priced. Option volatility - It's critical. Using Options to hedge. The importance of timing. How to Learn Spread betting and Prosper. Options - Home page. For my personal trading I like to use Core Spread Got to love their ultra low bid-offer spreads. All recommendations and comments are provided for general interest only and should not be construed as advice. Professional advice should always be sought before buying or investing in any financial product. The price of securities and any income from them can go down as well as up. Past performance of a security or market is not necessarily indicative of future trends. Any opinions and recommendations on LearnMoney. What are Traded Options and how can they be used to make profits and hedge stockmarket risk? This pages offers an introduction and a look at the basics. An Option is a derivatives contract on an underlying instrument. Options on London stocks are often referred to as ' Traded Options ', but there is no difference between a Traded Option and an Option. Conversely they can be used to limit and hedge risk. Some people therefore use the analogy of dynamite. Dynamite is the wrong hands can wreak havoc but in the right hands, for example when used it in the Alps to control avalanches, it greatly reduces risk. Note, most UK equity options deal in 1, shares whereas options on Traded equities are usually in shares. But information such as this should always be confirmed with your broker or online before any trading is done. When you're starting to learn about Options it is important to understand that they are somewhat like icebergs. Note the word ' generally ' above because it's important. But if you're starting out in Options or thinking about using them here's some golden advice - Don't even think about trading them until you understand how volatility works and influences the price of all options. For example, Put options on Sainsbury's will generally rise in value as Sainsbury's share price falls And as with Call options the word ' generally ' is important and it's related to how volatility is used in the pricing of all option contracts. This is why options are wasting assets. Premium - The value of an option and what the buyer pays or the seller receives Traded Price - The price at which the underlying product will be exchanged Expiry - The date when the option will expire The same terminology applies to both call and put options. Option prices are usually quoted in what they call an option chain. An Options change is where all the prices are quoted on the one screen. This is because they will always be many different options available and so traders often want to see the whole range. Intrinsic value is the amount of money an option is worth if it were exercised and turned into shares today. It is therefore the difference between the underlying security and the option's strike price. This means that options can have intrinsic values of zero explained below. Why, because of what's known as Time value and this is discussed below. There are three different sub terms used to describe both call and put options. This is obviously reversed with Put options. Just in the money - A call or put option that has a tiny amount of intrinsic value. A dictionary description of an option might read something like this - An option gives the holder the right but not obligation to buy a set number of shares at a set price on or before a set period of time. So why is the phrase ' right but not obligation ' used to define an option? I hope you can now see that buying calls or buying puts is not the only way to make money out of the direction of the underlying security. But remember - options are wasting assets. Important - Shorting is an excellent way to make money with options but it should never be done without - Having a very solid grasp of options, and Really understanding the risks involved, alongside having a plan to deal with them ie, not being like a deer caught in a car's headlights. Options are flexible tools for both making money and reducing risk in most financial markets, especially the stockmarket. If trading options options you must become an expert - that takes time. It is as simple as that and there are no short cuts.
10 Best Binary Brokers In 2017 - Top Binary Options Trading Platforms Review - Youtube
10 Best Binary Brokers In 2017 - Top Binary Options Trading Platforms Review - Youtube
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