Basic Terms You Must Know About Options Trading
Are you a newbie in the field of options trading? Do unfamiliar words serve as a barrier for you in understanding options trading concepts and processes? Do you want to learn some basic terms which are commonly used in transactions and other activities in this field? Worry no more and continue reading this page and it will help you understand some of the basic terms that will help you to learn more about options trading. Knowing this terms will help you to sound a little bit expert in the field of options trading and will give you an edge in dealing with your options trading situations.
First things first before going over this matter, the initial thing that a freshman in option trading must know is what an option is. An option, in financial terms, is said to be a derivative financial instrument wherein an agreement between parties will be set that in the future, an asset will be procured at a specific price which is called the reference price. Therefore, there will be a contract which will be mutually agreed by these parties. The purchaser will have the right to take part in that business while the supplier will be having the obligation to accomplish what is being agreed upon.
The value of how much is an option is determined by the difference between the reference price, which is also called as strike or exercise price, and the underlying asset, which can be a bond, a futures contract, a legal tender, or a stock, with an additional premium depending on the period until the option expires. Commonly, an option comes with an expiration date. The time when you can exercise (activate or use) the option depends on the option style whether it will be on or before the expiration date. If the option will not be exercised by its expiration, it will be termed as void and useless.
There are two terms used to determine an option regarding the right present in it. If the option presents the right, without the obligation, to buy a product or a service in a particular price, it is termed as a call; if an option gives a right, without the obligation, to sell a product or a service in a particular price, it is termed as a put. There are also two basic types of options. The first type is called exchange-traded option which is also termed as a listed option which are having standardized contract agreed upon conduct of a clearing house where the fulfillment has the assurance of the credit of the exchange. While the second type is known as the over-the-counter option which is agreed by the parties privately and not listed in an exchange.
There will really be much involvement of nerve-breaking levels of comprehension regarding terms and concepts about options trading. It will be really hard for a newbie to understand what he needs to know in order for him to be that familiar in the field. But learning the basic terms used in this field will be helpful to a trader or an investor in finding his way in understanding and comprehending deeper concepts of this trade.
As a trader who wants to go further in this, you must become equipped by its basics and become ready for learning more, because in this field, in order to succeed to the fullest, you shall never cease to learn more. Know more about options trading while succeeding more in your endeavors in this matter. The best way to learn is through experience, so what are you waiting for, start with it now!
by: Stanley Collins