In forex and options trading, a stock option is referred to as an “asset.” In forex trading, it is much like stock shares in that you are selling (not buying) a right, or “call” in the case of stocks and exchanges. In swap tax treatment you can also exchange your options and stocks for other currencies, but that is another topic. In form, a stock option is a contractual agreement that conveys the holder, or owners, the legal right, but no the obligation, to purchase or sell an underlying instrument or security at a certain strike price within a set period, usually one day, prior to or on or after a certain date, inclusive of fees and other costs.
Unlike mutual funds, bonds, and other asset classes, options trading does not accumulate a profit or loss. You simply purchase a call option at a certain strike price, and when you believe that the market will move in your favor, you purchase another call option at the current price. You are then gambling that the value of this option will go up or down. If it goes up, you make money; if it goes down, you lose money. This is how it works.
The two types of options are “call” and “put” options. A call option gives you the right, but not the responsibility, to purchase or sell a stock or other underlying asset at the strike price in the contract. If you purchase a call option, the risk-free asset that you own now is called your “put option.” If you purchase a put option, your risk-free asset is called your “put option.” Put and call options have different strike prices and they affect the values of stocks and other assets.
Options trading is complicated, so do not invest your money in Options without first learning all there is to know about it. If you really want to be successful in trading options, you must educate yourself. There is much to know about these derivative instruments other than what has been written here. However, if you want to learn how to trade options correctly, you should take an options trading course. In fact, if you do not want to take an options trading course, then you can read as much information about these instruments as you can before you ever set foot on the trading floor.
An options trader who is just getting started looks at the market from a very narrow viewpoint: the price of an underlying asset class. If that class is depressed, it is likely that the price of the options will be depressed as well. That is why you can make a lot of money very quickly using options. The best option-trading strategies to use as many different combinations of strategies as possible to maximize your profits. However, be forewarned: options trading is very risky, and you can lose a lot of money very quickly.
When you purchase a call option, you are simply writing an order to buy a certain amount of stock at a pre-determined price. The total premium you pay for the call option is the amount by which the premium of the call option increases each time you place a long position in the underlying stock. For example, if you buy a put option, you would pay the seller of the call option the total premium paid for the underlying stock, less the amount of the put option premium.
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