Easy explain of option trading with examples
Option trading can be a great way to make money, offering strategies for traders from beginner level to the most advanced. Before we can begin to make it work, though, there a few basic things that we need to understand. A listed stock option must be one of only two things:. It sounds simple with only two elements, but then so do the numbers 0 and 1. The exchanges specify the standardized easy explain of option trading with examples of every option contract.
There are several exchanges, and all are coordinated through a central clearing house. That asset is almost always shares of the stock of a given company, or of an exchange-traded fund. For example, the underlying asset might be shares of Apple stock. For each underlying assetthere are many different options available. Above is a small sample of the options for Apple stock for just one expiration date, December 16, The Strike column in the center of the chain lists the strike prices that are available.
The columns to the left of the Strike column refer to call options, while those on the right refer to puts. In this list that right easy explain of option trading with examples good through December Once you have paid for a call option you can buy easy explain of option trading with examples for the price shown in the Ask column, timesyou then have the right buy the stock at that price no matter what the market price of Apple stock is at some future date between now and expiration.
This will allow you to make money if Apple stock goes up while risking only a small fraction of the stock price. If you own the stock, this is easy explain of option trading with examples a guaranteed stop-loss. Besides the options listed above that expire in December, there are other expiration dates available as shown below:.
The expiration dates above range from November 11,which was just 2 days away when this article was written; to January 18,more than two years away. For every one of those expiration dates there is a list of available option strike prices that is similar to the one in the first diagram above, altogether there are over options for Apple stock. Once you understand the world of options, all these possibilities are open.
Stay tuned for future articles. If this piques your interest, check with your local center on option classes offered in your area. Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader.
The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.