Options are one of the most flexible trading instruments available to investors and are a terrific means of increasing your income. Options trading is less costly than stock trading and also gives a highly leveraged approach that can significantly reduce the total risk associated with a trade. When you trade options, a contract exists concerning whether a particular share or other asset will increase or decrease in value. One side thinks the price is due to fall within a specified time, while the other believes the price will rise in that time period. The option can be bought or sold, depending on which way the person trading options thinks the value of the underlying asset will go. Option investments gives the investor the right, but not the obligation to buy or sell a specified number of shares at a specific price before or at a certain date in the future.
Trading in the options markets requires an understanding of certain jargon. The price that an underlying stock can be bought or sold for if the option right is used, is called the "strike price". There are a number of strike prices available which are higher and lower than the currently traded price of the underlying stock. The premium is the price on an option. Premium is determined by various factors such as the remaining time available to exercise and option volatility. When you invest in options it is important to understand that each option translates to 100 shares. There are two types of options when practicing online options trading that you should be familiar with. The ‘call’ option bestows on the holder the right to buy shares, and the ‘put’ option gives the option to sell shares.
Option investments follow a four-month cycle interval in addition to three unchangeable cycles. Stock options expire at the close of business on the third Friday of every expiration month and every stock has an associated cycle of months that options are offered in. The way it works is the listed options are all available for the current month and the following month and additionally for a specified period of time in the future. There are four monthly cycles for online option trading. They are:
1) January, April, July, and October
2) February, May, August, and November
3) March, June, September, and December
The beginning investor will find that trading in options is a little more involved than trading in shares. Once successful traders become confident, they understand the very real possibility of securing a significant monthly income that compliments their existing portfolio. In addition, they soon become aware of the ability to achieve a 100% and above return on investment on favorable trades. You should also put forth the effort in your option trading education to participate in creative trades. It is unusual in this market to find people who show creativity when investing in options. By learning effective and creative options trading techniques, you are well prepared to succeed with your investment strategies.