Stock Options Trading
Stock Option Trading is when an owner enters into a contract to buy or sell stocks at a fixed price within a specified time frame.
It’s important to note that stock option trading is different from stock trading. When an owner is buying or selling actual stock or ownership in a company, this is known as stock trading. However, in stock option trading, the owner is buying the option i.e. they are entering into a contract to buy or sell stocks at a fixed price within a specified time frame.
The benefit of stock option trading is that there is a much greater potential of succeeding in the trade, than if a person bought the stock itself. Since stock options can be purchased at a fraction of the actual price of the underlying stock, it allows the investor to control a much larger amount of stock, if they buy stock options as opposed to shares. This opens up the field of stock trading to a much wider audience.
Stock option trading is a type of binary trading. This means that the payout the owner receives is determined at the start of the contract. When trading, the owner knows exactly how much he will receive should his option expire in-the-money, and more importantly how much he will lose should the option expire out-of-the-money. So there is no worry that an owner of a trade will need to fork out extra funds once trading the stock option has expired.
The option trading of stocks extends further, to the trading of other assets such as commodities, indices and currency pairs. Trading options can be an extremely profitable exercise, since each trade can be personalised to suit the owner’s needs. Once the preferred asset is selected, the owner can choose from a range of expiry times, such as nearest hour, end of the day, week or month.
This means that stock option trading is open to everyone, no matter where they sit geographically or what previous knowledge they have of the financial markets. It is extremely flexible, allowing for unique combinations with every trade.
What is an option?
An option is a contract which gives the buyer (known as the owner) the right, but not the obligation, to buy or sell an underlying asset at a fixed price within a specified time frame.
An underlying security is the item which is being traded. This could be stocks, commodities, currencies and indices. The fixed price at which they buy or sell at, is known as the strike price.
There are two types of option strategies: Call and Put.
In a call option, the owner may buy a quantity of an underlying stock at the strike price within a set time frame.
The buyer of a call option believes the market price of the stock will rise above the strike price. If this materializes, then the option (or contract) allows the owner to buy the stock at the original price which is lower than its current price. This means he can profit from buying the stock below its market value and profit from the difference.
In a put option, the owner may sell a quantity of an underlying stock at the strike price within a set time frame.
The buyer of a put option believes the market price of the stock will fall below the strike price. If this is the case, then the option allows the owner to sell the stock at the original price which is higher than its current price. This means he can profit from selling the stock above its market value and profit from the difference.
In the options market, there are both American and European options. American style options can be exercised at any time up to, and including, the expiration date and time. Whereas European options can only be exercised at the expiration date and time itself.
A stock is the value of a company’s assets and profits. It shows what the company is worth were they to sell off everything they own. For example Marks and Spencer, Google and Citigroup, each have stock which represents their value in the market place.
So, a stock option is when an owner either buys (in a call option) or sells (in a put option) the stock of a particular company. For example, Owner X may believe that the performance of Company Y is improving and therefore may decide to buy stocks (call option) in Company Y, so that he can profit from the rising price of the company’s stocks. If the stocks of Company Y succeed in increasing, then Owner X will profit from buying the stock earlier at a lower price.
Stock options are a specific type of option, since there are different types available, stocks being just one of them. See anyoption™ for a list of stocks available for investment.
A stock option is a type of binary option. That means that the payout is determined at the onset of the contract. There are only two possible outcomes: or the option expires in-the-money and the owner receives a fixed amount of cash; or the option expires out-of-the-money and the owner receives nothing. However, with anyoption™, an owner receives 15% back if his option expires out-of-the-money.
Receiving a payment with a stock option is independent of the magnitude by which the price of the stock moves. For example, an owner may buy a call option for £100, expiring at the end of the day, for a return of 70% on the stock of Company Y, currently at 94.53 points.
If at the end of the day, the stock ends at 94.58 then the option has expired in-the-money and the owner will receive £170. They receive the full 70% payout, regardless that the stock only moved 0.05 points. This demonstrates the simplicity of stock options.