subject: Ways To Explain Options Trading? [print this page] Before jumping into any new form of investment, it is important that you are able to thoroughly understand the activity. For example, can you explain option trading? It this is something which you will direct your nest egg or income towards, you must be able to recognize precisely what it involves.
Someone who can explain option trading will naturally have a clear understanding of the fundamental terminology, processes, and policies. This is not as easy or even as "basic" as it looks. Option trading is fairly a distinctive approach to control information and generating a certain level of risk management, and it doesn't even have to involve the purchase of a single stock, security or commodity.
If you can explain option trading accurately then you perhaps the right candidate to begin participating in this productive approach to investing immediately.
One of the biggest mistake done by millions of investors is to simply supply their hard won income to a trader or brokerage without first knowing what is going to be done with their money. Even if a financial expert clarifies what portion of the portfolio is going to be directed at options trading, it is not good enough if the actual investor doesn't really know what it means.
So, how you can explain option trading fundamentals? Without giving the detailed information, suffice it to say that an option trading is an agreement or contract between the buyer and the seller. The buyer is purchasing the "right" to buy or sell at least one hundred shares of an underlying asset (which could be a stock, commodity, or other financial vehicle) at a predetermined price. The merchant or "writer" is obligated to honor the terms of the agreement.
How does this work in the world of financial trading? It is actually very simple - let's say you are a buyer who believes a particular stock is going to rise in value by a certain time period. You meet a writer in order to purchase a 'call option' to buy that stock at a fixed price before certain date. If you exercise the option you can purchase that stock for the guaranteed price, or you can just sell your option for the profit. While that is the most streamlined and overly simplified explanation, it does indicate the way that options can be used to leverage risk.
by: Idealtrading
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