It is more common than not to get confused when you hear about trading stock options. This remotely popular area of specialization deals with the intangible assets that a buyer of a stock option receives upon conclusion of a stock option contract. In actual fact the buyer of a stock option gets the right to buy particular stock from an investor at specific price and date, as stipulated in the contract. Trading in stock options can be really exciting indeed, but like any stock market investment it is unpredictable and great losses can be made.
Over and above this kind of trading is used by already established stock investors to grab control of an already profitable stock market. For them trading in these stocks is a way of generating additional revenue, on top of what they make from actually trading in real stocks. I mention “real stocks” because options only reflect the underlying value of certain stock shares. So in reality a trader buys the right to buy a particular type of share, not the share itself.
Stock options are therefore contracts that give you the opportunity to buy or sell shares in a company. So the person buying the option is allowed, but not required, to buy or sell such company shares at a chosen price as stipulated in a contract. The contract that gives the trader the right to buy shares is a “call option” and that which gives a corresponding right to sell shares is referred to as a “put option”. Plus, the stipulated price of buying or selling is called the “strike price”.
There are what are referred to as listed options. Listed options are contracts that can be concluded between the investor (owner) and the trader for the buying or selling of 100 shares of a certain company. Quite surprisingly the written terms and conditions in listed stock option contracts are standard and do not contain variations when it comes to terms that might deal with consequences of a rise or fall in a share price on the buying or selling date, as predetermined in the contract.
A person buying options is given a right meant to be exercised for buying or selling, depending on what type of options they have purchased. Generally the U.S laws on trading “put” and “call” options state that an owner of these stocks can exercise his/her rights before or on the expiry date for selling or buying shares. However, in some jurisdictions the right to sell or buy can only be exercised on the expiry date.
Not anyone can issue stock trading options, only “writers” can do so. These writers charge you a certain premium so that they can cover the costs they incur when facilitating the trading transactions. Writers facilitate transactions when, for example, a stock trader chooses to exercise his/her purchasing or selling option in terms of the contract. But this is not all there is to this trade stock option business.
There are secrets and rules you ought to obey if you want to go far with trading stock options. In general it is safer to buy “put options”. With these you are guaranteed to have protection on your investment since you can still sell shares at a strike price if prices fall or rise. Your core objective should be to get “in the money”. This is when the underlying stock price is more than the strike price on a call option, or less for a put option.