Business & Finance Finance

Learn About the Trading of Options on the Stock Exchanges

Options are basically of two types – call option and put option. When buying the call option, you are buying the right to buy shares from the other party at an agreed price. The other party who is selling call option has obligation to sell the stocks to you if you exercise your call option. Put option is exactly reverse of call option.

If you are an active investor in the financial world, you may have dabbled with trading in options. Although this kind of investment and trading may be too risky especially for those who are new players in the game, it is certainly a great option for the experienced ones. While dealing in stock options, investors can benefit from certain advantages such as you can increase the income against your stock holdings; you can prevent risk from a decline in the stock market; you can buy stocks at lower prices as well as you can hold position in the big market even without knowing where the market shall going to move.

Now let's throw some light on the basic concept of options trading in order to provide you complete knowledge and insight on the entire subject. Basically, trading options or exchange traded options or day traded options are the instruments that provide an opportunity to investors to buy or sell their stocks somewhere on a future date. It is nothing but an agreement in which one party agrees to give the right to the other party to buy/sell the stocks from the first one on a future date at an agreed upon price. It is important to consider that first party gives second party the right but not obligation to buy stocks. In against of creating the option, first party (option writer) is getting payment in the form of "premium" from the other party (option buyer).

Mainly, the options are of two types - call option and put option. While buying the call option, you are buying the right to buy shares from the other party at an agreed price and at the same time the other party who is selling call option has obligation to sell the stocks to you if you exercise your call option. As a matter of perspective, it has been determined that if the market goes up and the price of the stock increases, then the buyer would definitely exercise the call option as he/she is getting stocks at a lower price. Conversely, if the market goes down and stock prices fall, then buyer shall not exercise the call option and will cancel it because these same stocks he/she is getting at less price in spot market.

On the other hand, put option is exactly reverse of call option. If you are buying a put option, then you are actually buying the right to sell your shares at an agreed price to the option seller on a future date. On the expiration day, buyer is getting the right or freedom to exercise or ignore the option whereas seller/writer has compulsion and bounded to trade in the deal. Moreover, the same trading mechanism will be applied here as well. If the market goes up, then the put option buyer shall not exercise the option as he gets the opportunity to sell his underlying assets at higher prices in the spot market.

Subsequently if market goes down, then he will certainly exercise the option as he sells the stocks at higher prices; though stock price being less in spot market.

Indeed, these day-traded options provide flexibility to the investor owing to its unique combination of risk and reward that allows investor to hedge or speculate position in the stock market. Aside, trading options are highly preferable for investors as there is a limited risk to the option buyer while allowing them to leverage the prices of stocks for a fixed particular period of time.


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