Stock Market Trading
About Options Trading
Options have become very popular among speculators. They are especially attractive to those traders who are looking for great leverage based on a small investment. As a rule, a broker requires $2,000 as the minimum margin for options trading. With such a small amount, an investor could expect 20-100% profit (it could be even larger) in a short period of time.
However, by trading options, a trader should always remember that time affects options’ prices and that an options decline in price over time, especially as it approaches its expiry date. A second thing to remember is that the price of an option depends on the volatility of the underlying stock. It is the best to buy options when the volatility is at a high level. Also, time spread options may generate the highest profit as with the increase in volatility, the option premium also increases. On the other hand, periods of low volatility might be good for selling uncovered options.
One options contract always covers 100 shares of underlying stock. As an example, one QQQ option contract covers 100 shares of QQQ stock (NASDAQ 100 tracking stock). This is why, when you buy an option contract, you must multiply the premium by 100. There are two types of options available - Calls and Puts. A "call option" contract is a contract that gives the option holder the right to buy 100 shares of the underlying stock before the expiration date at a specified price (called a strike price). A "put option" contract is a contract that provides the right to sell 100 shares of the underlying stock before the expiry date and at a specified price (the put's strike price).
Expiration date (or expiry date) and strike price are the two most important parameters of an option. If the underlying stock trades below the strike price, an options put buyer is guaranteed that he can sell an equivalent number of shares of the underlying stock at the strike price before the expiration date. If the underlying stock trades above the strike price, an options call buyer is guaranteed that he can buy an equivalent number of shares of the underlying stock at the strike price before the expiration date.
The Option premium, which one pays for options, depends on the time remaining until expiration of the option. As the expiration date approaches, the option becomes attractive and its price is cheaper. For example, a the premium paid for a one-month expiration option is less than that for a two-months expiration option, and so on. However, you should remember that the price paid for options reflect the risk involved. The cheaper options are, the riskier it is to buy these options.
QQQQ and SPY options are the most actively traded options on the market. There are other options, on nearly all stocks that are traded in the market, as well as on indexes (NASDAQ 100, S&P 500, etc) and futures, etc.
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