Stock Trading: A Simple Explanation - Part 6 of 6
Options In my opinion the next best instrument for trading are options.
Banks are inventing more derivatives and hype them as the next best thing.
But options offer a lot of possibilities that can help you a lot.
It is possible to buy them, but you can also write them (selling without actually owning) I suggest that you take a look at writing options.
The writing is a bit more complicated, but the chances for profits gain immensely.
Seventy percent of the options expire useless.
This means the profits go to the writers of these options.
Back to basics, I'll explain in short how this works.
There are Call options and Put options.
A call gives you the right to buy the value of the stock and a put option gives you the right to sell the stock at a certain value.
Every option has a price that has been determined upfront.
Every option has a date when it expires.
You can buy options (+1) and you can also write (-1).
Writing means offering the option to a buyer.
That buyer has the right to buy and you have the obligation to sell.
Traders can trade options, you don't have to keep the option until it expires.
But when the buyer of an option executes the option, the stock exchange will force you to sell at the price set in the option.
The bank or broker will take care of the rest.
If you place one option this represents 100 stocks.
Option executing can take place at any time, the buyer of the options decides this.
Settlement is determined by the underlying value.
If you write options, the bank will demand a margin.
A margin is a security to be sure that you can fulfill your obligations.
If you can't secure enough margin, a margin call will take place, where eventually the bank will force a close of the position.
It's sad if this happens to you and the writing trader.
He had to be smarter and act sooner.
The size of the margin is determined by the stock market as well as the bank.
The market sets a minimum price and the bank usually is a bit more strict.
Most traders don't get past the point of buying options.
The reason for this is that it is the most simple way and they fall for the marketing talk that the profits are endless.
The fact that only 30% of all options expires with value and the chance for loss on a bought option is enormous stays underexposed.
I suggest that you don't make a habit of buying options and surely no options that expire over a short period of time.
If you are going to use options I strongly advise you to follow an option course or get professional help, this is worth every cent! If you buy options that expire in a short period of time it's gambling! In a lot of cases the earnings disappoint, so be careful.
Banks are inventing more derivatives and hype them as the next best thing.
But options offer a lot of possibilities that can help you a lot.
It is possible to buy them, but you can also write them (selling without actually owning) I suggest that you take a look at writing options.
The writing is a bit more complicated, but the chances for profits gain immensely.
Seventy percent of the options expire useless.
This means the profits go to the writers of these options.
Back to basics, I'll explain in short how this works.
There are Call options and Put options.
A call gives you the right to buy the value of the stock and a put option gives you the right to sell the stock at a certain value.
Every option has a price that has been determined upfront.
Every option has a date when it expires.
You can buy options (+1) and you can also write (-1).
Writing means offering the option to a buyer.
That buyer has the right to buy and you have the obligation to sell.
Traders can trade options, you don't have to keep the option until it expires.
But when the buyer of an option executes the option, the stock exchange will force you to sell at the price set in the option.
The bank or broker will take care of the rest.
If you place one option this represents 100 stocks.
Option executing can take place at any time, the buyer of the options decides this.
Settlement is determined by the underlying value.
If you write options, the bank will demand a margin.
A margin is a security to be sure that you can fulfill your obligations.
If you can't secure enough margin, a margin call will take place, where eventually the bank will force a close of the position.
It's sad if this happens to you and the writing trader.
He had to be smarter and act sooner.
The size of the margin is determined by the stock market as well as the bank.
The market sets a minimum price and the bank usually is a bit more strict.
Most traders don't get past the point of buying options.
The reason for this is that it is the most simple way and they fall for the marketing talk that the profits are endless.
The fact that only 30% of all options expires with value and the chance for loss on a bought option is enormous stays underexposed.
I suggest that you don't make a habit of buying options and surely no options that expire over a short period of time.
If you are going to use options I strongly advise you to follow an option course or get professional help, this is worth every cent! If you buy options that expire in a short period of time it's gambling! In a lot of cases the earnings disappoint, so be careful.
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