When the buyer of a long option exercises the contract, the seller of a short option is "assigned", and is obligated to act. After three months, you have the money and buy the clock at that price. If you understand this concept as it applies to securities and commodities, you can see how advantageous it might be to trade options. For a relatively small amount of capital, you can enter into options contracts that give you the right to buy or sell investments at a set price at a future date, no matter what the price of the underlying security is today.
Some things to consider before trading options :. Leverage : Control a large investment with a relatively small amount of money. This allows for strong potential returns, but you should be aware that it can also result in significant losses. Flexibility: Options allow you to speculate in the market in a variety of ways, and use a number of creative strategies. There are a wide variety of option contracts available to trade for many underlying securities, such as stocks, indexes, and even futures contracts. Hedging: If you have an existing position in a commodity or stock, you can use option contracts to lock in unrealized gains or minimize a loss with less initial capital.
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What is options trading? What is an option? What are call options? What are put options? Risks to trading options The risks involved in using options depends on the strategy employed. Reasons to trade options Just as in every other investment choice, circumstances of the individual are important in determining the "right" options strategy. Here are some of the reasons that investors and traders may want to trade options: Investors Earn income from your share portfolio - Investors can generate income from their portfolio by writing call options against their stock holdings.
This is known as a covered call, or buy-write, and is one of the most commonly employed strategies by investors. Protect share holdings — investors concerned about the near term outlook for a stock holding can protect against a share price fall by taking a put option in that stock.
Options are available over more than 70 of the top shares listed on Australian exchanges. Protect portfolios — investors worried about the market outlook can offset potential portfolio losses by taking put option over the index.
Learn the basics about call options - Fidelity
If the market falls, the put options increase in value as the portfolio declines. The effectiveness of this strategy depends on a number of factors, including the composition of the individual portfolio. If the share price is below the option strike price at expiry, the investor buys the stock at the strike price and keeps the premium for the original put option write.
However in this scenario the investor still keeps the original premium. This is often referred to as a cash-covered put write. Trade more opportunities — Option prices are sensitive to more factors than just the movement in the underlying share or index. Changes in volatility, interest rates and dividends can affect the value of options.
Buying Call Options: The Benefits & Downsides Of This Bullish Trading Strategy
This means traders can choose positions that reflect their views on more instruments and markets. Increase capital efficiency through leverage — traders use the leverage options provide.
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