The Truth about Stock Options and Options On Futures Trading
The subject of trading stock options
and commodities is a complex one, but one worth of pursuit. This article looks
at trading stock options and futures.
The subject of trading stock options and commodities is a complex one, but one
worth of pursuit. This article looks at trading stock options and futures.
Let's look at the basic facts about options trading before we go any further.
Like any human endeavor, options trading is best described in very careful
language so that there's no confusion about our meaning. First, let's take a
look at exactly what an "option" is. An option refers to just that, the option
to purchase certain stocks or certain commodity items by a certain date. This
means you do not gain controlling interest in the stock or commodity until that
date. For this reason, options can, and often do, expire worthless. There are
two types of options contracts:
1) Contracts to buy blocks of stocks by a certain date
2) Commodity futures which are options to buy blocks of hard goods by a certain
date
If you have options on 10,000 bushels of corn, whoever sold it to you cannot
sell it to someone else until the expiration date of your contract has expired.
In exchange for giving you this right, they wrote the contract and took money
from you. If you don't exercise your options prior to the expiration date, they
will expect full control of their corn again, and will sell it someone else.
What makes options such fascinating instruments are these facts:
1) With options you can sell that which you don't own or ever plan on buying
2) You can buy something you don't ever plan on physically holding and sell it
for a profit
Another great thing about options is their inherent flexibility: although you
have the right to buy or sell a certain stock or commodity, the choice is yours.
You're not forced to exercise your options. You can always sell your options
contract to someone else. Many traders of commodities and options always sell
the contracts only and have never taken physical possession of any underlying
asset they've ever traded. The leverage in options gives you a chance to earn
extremely high returns. These types of options we're describing are referred to
as covered options. With covered options you actually plan on or do own the
underlying asset that you purchase options contracts for. Uncovered options are
the exact opposite. Like the word uncovered means exposed, uncovered or naked
options are considered more dangerous, because you are merely speculating
without having an ownership interest. You are exposed to the risk without the
benefit of owning the asset.
Options trading involves a great deal of leverage in the form of margin loans to
your trading account. All options trades are highly leveraged, so you need to
add margin interest to your calculated costs when considering a career in
trading options. Pricing and potential returns on options trading depend very
much on real world circumstances. If you purchase corn futures, for instance,
there are literally hundreds of variables that affect the price of the corn, and
hence your investment. If a corn shortage is expected in a certain part of the
world, your investment might hit big because the price of corn could rise
dramatically. On the contrary, perhaps government subsidies have introduced a
glut of corn into the world market. In that case, your investment might tumble.
Futures contracts for commodities and options contracts on stocks are strictly
based on guessing what events will happen in the future. Of course you'll always
attempt to make as accurate as a guess as possible, but let's face facts: in
this world unforeseen things can and do happen. For this reason, protect your
downside, and only invest with money you can afford to lose. Options trading can
be very profitable, but unsurpisingly it's also very risky.
Article Source:
http://www.awesomewebessentials.com
About the Author:
Please visit the Options Trading
Forum for more information on Trading Options.
(Disclaimer: This article was written from research and what we learned from multiple sources over an extended period of time. This information is for educational purposes only. Please contact a professional in the area of concern before making any decisions on this or any topic. No-More-Scams.com is not liable for any damages or losses due to one using this information).
Go to Consumer Directory For Businesses
Go to Consumer Reports and Tips Archives