A Brief Description of Option Trading Services |
Option trading services is one of the most misunderstood trading procedures in the world today. It is really important that the people, particularly the ones who are interested in investing in the stock markets should be made aware of the real meaning of option trading. In the opinion of many traders, option trading is nothing more than a substitute of stock that has a higher leverage and less required capital. But the truth is very much different. The options have a very different tenor than the stocks.
There are mainly two types of stock options that are:
a) The call option- When you buy a call option you have all the rights in the world to purchase a stock at the strike price any time before the expiration. Remember you have the right and are not under any obligation to do so.
b) The put option- The purchase of the put option gives you the freedom to sell a stock anytime at the strike price before the expiration date. Once again you are under no obligation to do so.
Another major difference between the stocks and the stock options is that the purchase of the stocks gives the buyer a certain extent of ownership in the company whereas the stock options just give you the contractual freedom to buy or sell the stocks at a specific price and before a specific date.
Anytime when an individual sell options they generate a security that did not exist before. This process of selling an option is better known as 'writing an option.' Neither the associated company nor the options exchange issues options. Thus in the terminology of the options trading, when an individual writes a call then he is obligated to sell shares at the strike price anytime before the expiration date, and when he writes a put then he is obligated to buy stocks at the strike price anytime before the expiration date.
Buying and selling of options is a very complex affair. It is not as easy as it appears to be. Therefore having a trusted aide with whom you can do the selling or purchasing of the options is very much vital. Another important aspect of trading in options is that the only thing that you can loose in the trading of options is the premium that you have paid, otherwise the profits that you can make are unlimited. In fact the writer of the option is the one who is under the risk of loosing much more than the buyer of the option until and unless there is another option that is covering it or until there is some percentage in the underlying stock.
About the author: TraderXP
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