How to Trade Stock Options
Stock options are rights that a stockholder is entitled to as far as his investment is concerned. The rights give him a choice to sell or buy some particular securities underlying that stock at a given price on a given date if he so wishes. However, let it be noted that, there is quite a difference between stocks and options as two different entities.
Stocks, as they are well known are types of securities that an investor can buy, just like bonds, shares or treasury bills. Options on the other hand are options that are placed on all the different types of securities there are, but again depending on the policies and the laid down regulations of the issuing company. Just like stocks, options also come in different types. However, unlike stocks, options have got an expiry date, upon which the right to sell or buy should have been exercised or the buyer just forgoes the right.
The two options that a buyer has on his stocks are either a call or a put option. A call option is the right to buy or purchase a stock at the strike price but one is not obligated to do so. A put option is the right, but not the obligation to sell your stocks at the determined price, on or before the expiry date. During the trading of the options, it is worth noting that if an investor decides to sell the option, he is creating a security that did not exist before.
This is what is commonly known as writing an option. If one decides to sell their rights, they become obligated to sell the stocks that were under the option, way before the expiry date. Since an option gives time for speculation, when they are traded way before expiry date, the chances for losing are high because then the stocks may not have hit the targeted price.
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