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THE OPTIONS COURSE- Option Basics

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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’

THE OPTIONS COURSE- Option Basics

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THE OPTIONS COURSE Option  Basics After I was introduced to the futures market I saw how, with a  small amount of capital, I could increase my leverage and control  much more of a particular commodity using less money. What I  did not fully understand was the potential risk. Shortly into my futures  trading career, it became evident to me exactly what could happen to an  account when one was on the wrong side of the futures market. This re sulted in a temporary setback referred to by many in the business as a  margin call, which requires a trader to provide additional money to the  broker as a guarantee to stay in the trade. Later that year, I returned to  the futures market with a more disciplined approach that included trad ing options.  As a trader, I find options to be the most effective way to maintain con sistent trading profits. They have become vitally important tools in my  trading toolbox. However, like any tool, they are most effective when used  properly