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  • Options Trading

    Options trading has been a popular market for investors over the years. The stock market and the bond market are two examples of where options trading comes in.

    Options trading in the stock market is simply buying or selling a stock, index or bond based on the option that the buyer has. When the option buyer makes the contract he or she is giving the seller the right to sell the underlying stock at the agreed upon strike price within a certain period of time, which will be stated as a time period. In options trading, an option is basically a contractual agreement that grants the buyer, the right to buy or sell an underlying asset, instrument or security at a stated strike price before or on a specific date, based on the terms of the contract. The buyer may also pay a premium for the right to purchase, called a margin or premium.

    The most common option being traded today is the call option, which gives the seller the right to purchase a stock or bond at an agreed upon price in the future. The seller must pay a specific amount of money, which is called a premium, or mark up before the contract is fully exercised. If the buyer holds the option for a certain period of time, he or she can exercise the right to purchase the underlying asset, while if the buyer does not exercise the right to purchase the underlying asset, he or she does not have the option and the seller must not sell the stock.

    Options on equities is also a popular option trading. Equity options are contracts for the seller to purchase a certain share of stock or bond at a price specified by the buyer. The buyer may also pay a premium, a margin or premium for this right to purchase.

    There are also trading strategies that investors can use when trading options on stocks and bonds. Some strategies include taking advantage of trends such as a rising market, or falling markets. Some other strategies involve the use of the futures markets, or hedging.

    When trading options, it is important to be knowledgeable about the options you are considering so you are not surprised later on. It is also important to get the advice of a professional broker when trading options since they are the best persons to help you understand the risk and return for your investment.

  • Using Covered Calls

    A covered call is an investment market transaction where the buyer of covered calls has the right to buy or sell stock or securities at the strike price, or closing price on a date later than the agreed upon date, but not to exceed the amount of cover specified in the contract. These types of transactions can be used by both parties, as long as they are within their rights.

    When a stock holder, for example, purchases a covered call and is willing to sell within the terms of the contract, but is held by the stock issuer’s right of redemption, then the purchase of such a call does not reduce the stock holder’s stock ownership percentage and therefore it would be a negative exercise on the call. However, if such a purchase results in a decrease in stock price, then it could be considered as a positive exercise.

    Covered calls are not usually made by small businesses. It is more commonly used by large financial institutions and hedge funds, which use such contracts to purchase securities to increase the amount of capital they own. However, small businesses can also benefit from a covered call, since they can purchase the stock at a lower price in a covered sale than the actual price at which the stock was purchased. The effect of this is that the small business owner is able to capitalize on the lower value of the stock by making a profit.

    Although there are various forms of covered calls available, all covered calls require the same basic components. The key components include: the strike price, expiration date, and the amount of protection. In order to properly analyze a particular call contract, it is important to understand the details of the strike price, expiration date, and the amount of coverage.

    The strike price refers to the price per share that is set by the issuer and is used to determine the amount of cover required for a covered sale. If the strike price is higher than the market price, the buyer is entitled to buy the shares at a reduced cost. On the flip side, if the strike price is lower than the market price, the buyer will lose his entire investment.

    The expiration date refers to the period after which a covered sale will become unprofitable, in which case it becomes unenforceable. During the time after the expiration date, no one is allowed to buy or sell the stocks, as well as the underlying securities, unless the contract was renewed for a shorter period. This is called re-entry. The period can be as short as six months, or as long as five years.

    The amount of protection refers to the amount of cover, which is offered by the issuer, which must be determined prior to purchase, before any call is made. Usually, larger amounts of coverage are recommended, since losses are likely to be more severe.

    When a call is made, potential buyers typically will attempt to negotiate terms, in which case they will attempt to reduce the amount of protection by increasing the strike price. However, some sellers have a tendency to try to negotiate for an increased amount of protection, so that they have more leverage in the negotiations.

    Option contracts are an integral part of many financial products, including the S&P option. These contracts are similar to covered calls in the sense that the value of the underlying security is locked in for a specific period of time, before the option expires. While options offer the purchaser a great deal of flexibility, they are also used in situations where the seller has no other legal means of protecting his investment.

    Option contracts are typically purchased by financial institutions, with the objective of obtaining a reduction in risk by reducing the premium that is paid to the seller. These are known as margin accounts.

    Options are not only useful in times of financial crisis, but are also used for hedging strategies. This is especially true in situations where the stock prices have declined dramatically. In other words, when the stock price is expected to decline further than it has fallen, it is possible to hedge against the negative impact of the decline by purchasing additional stocks to offset the loss.