Showing posts with the label options-trading-example


THE BASIC APPROACH Introduction What Is an Option? Although options are typically bought and sold through security dealers and brokers, it is  important to understand that options are not securities. Unlike stocks, warrants, or  corporate bonds, options are not authorized or issued by any company on its behalf.  Rather, an option is simply a contract between two parties, a buyer and a seller. The  buyer is often referred to as the owner or option holder, and the seller is often referred to  as the option writer. A call option gives the option holder the right to buy an asset at a  set price within a certain time, while a put option gives the option holder the right to sell  an asset at a set price within a certain time. In neither case is the option holder ever  obligated to buy or sell. For an example of an option contract, suppose you're in the market for a new car. Sitting  there in the dealer's showroom is that spectacular model you'd love to own. B


THE OPTIONS COURSE Option Basics MECHANICS OF PUTS AND CALLS As we have duly noted, there are two typ es of options: calls and puts.  These two types of options can make up the basis for an infinite number  of trading scenarios. Successful options traders effectively use both kinds  of options in the same trade to hedge their investment, creating a limited  risk trading strategy. But, before getting into a discussion of more com plex strategies that use both puts and calls, let’s examine each separately  to see how they behave in the real world. Call Options Call options give the buyer the right, but not the obligation, to purchase  the underlying asset. A call option increases in value when the underlying  asset rises in price, and loses value when the underlying falls in price.  Thus, the purchase of a call option is a bullish strategy; that is, it makes a  profit as the stock moves higher.  In order to familiarize you with the basics of call options, let’