What Is Options Trading?

Submitted by: Andy Poon

An option contract is an agreement between two parties to buy/sell an asset (In this case, the asset refers to stock) at a certain price and specific date.

It is called an option because the buyer is not obliged to carry out the transaction. If, over the life of the contract, the asset value decreases, the buyer can simply elect not to exercise his/her right to buy/sell the asset.

There are two types of option contracts - Call options and Put options. A Call option gives the buyer the right to buy the underlying asset, while a Put option gives the buyer the right to sell the underlying asset.

A simple example: Peter buys a Call option contract from Sarah. The contract states that Peter will buy 100 Microsoft shares from Sarah on the 5th May for $25. The current share price for Microsoft is $30.

Note: this is an example of a Call option as it gives Peter the right to buy the underlying asset.

If the share price of Microsoft is trading above $25 on the 5th May, then Peter will exercise the option and Sarah will have to sell him Microsoft shares for $25. With Microsoft trading anywhere above $25 Peter can make an instant profit by taking the shares from Sarah at the agreed price of $25 and then selling the shares on the open market for whatever the current share price is and making a profit.

The $25 value, which is stated in the agreement, is referred to as the Exercise (or Strike) Price. This is the price at which the asset will be exchanged.

The date (in this case 5th May) is known as the Expiry (or Maturity) Date. This date is the deadline for the option contract. At this date, the option buyer is to decide if a transaction of the underlying asset is to occur.

Outcomes: Let's imagine that at the expiration date, Microsoft is trading at $30, then Peter will buy the shares from Sarah at the agreed $25 and then he can sell them back on the open market for $30 and make an instant $5.

Alternatively, if Microsoft is trading at $20, then buying the shares from Sarah at $25 is too expensive as he can buy them on the open market for $20 and save $5. In this situation, Peter would choose not to exercise his right to buy the shares and let the options contract expire worthless. His only loss would be the amount that he paid to Sarah when he bought the contract, which is called the Option Premium - more on that a little later. Sarah would, however, keep the option premium received from Peter as her profit.

All in all, there are more than 50 strategies you can deploy in options trading by combining many different strike prices and expiration. But do you need to know all?

The good news is you do not have to!In fact, most of them allow you to make money very slowly or limited.

About the Author: Find out more about options trading and its strategies to profit big time from the market by visiting http://www.BuyLowSellHighTips.com

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Delta Neutral Options Trading Strategies - Profiting From Time Decay and Volatility

Submitted by: Gavin McMaster

Delta is the amount by which the price of an option moves for every dollar move in the underlying security. For example, an at-the-money call option which has a delta of 0.50, the option price will increase by $0.50 for every $1 move in the underlying security. If you were to purchase 2 at-the-money call options, your delta would be 1, and your position would move inline with the underlying. Deep in-the-money calls will have a delta close to 1, and deep out-of-the-money the option, calls will have a delta close to 0.

My Favorite Delta Neutral Strategy

Basically this strategy means selling multiple out-of-the-money puts (positive delta) and selling the underlying stock (negative delta) in order to obtain a delta neutral position. This trade can be risky, so you need to ensure you comprehend the trade before attempting it. These are some of the factors I look for when determining whether to use this trading strategy:

* Generally I pick a stock I'm slightly bullish on. The reason being that as underlying stock increases in price, my delta will increase. This is due to the delta on the short stock position remaining at -1 while the delta on my puts will increase. So the best scenario for me is that the stock rises slightly.

* This is also a trade that will benefit from decreasing volatility, so I pick a stock that has high volatility that I think will decrease in volatility over the course of the trade. The other benefit of high volatility stocks is that you receive more income for your out-of-the-money puts. Although, as with everything be aware that the greater the reward, the higher the risk!

* I pick a stock that I know a lot about. Picking a stock that you know little about just because it fits with your option strategy is a recipe for disaster.

* I plan in advance how I will manage the trade and whether I will dynamically hedge the delta. As the underlying security moves, so will my delta so that I am no longer in a delta neutral position. Before I make the beginning trade I will know what I plan to do in this scenario. If I am bullish on the underlying and my delta becomes positive (i.e. I now have a long exposure), I may leave the trade as is because I am happy with a slightly long bias. Otherwise I might short more stock to get my delta back to zero. I would also plan how often I was willing to do this, as commissions will start to add up and eat into my profits.

* This is a fairly risky strategy, so I generally do not use too much of my capital.

In the past, stocks on which i have successfully used this options trading strategy include RIMM and EWZ. For more information on this options trading strategy and other options strategies, please visit Options Trading IQ. This site is aimed to help you learn everythign you need to know about options trading and improve your overall investment IQ.

About the Author: Gavin McMaster http://optionstradingiq.com

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Binary Options Trading Courses

Submitted by: Jenny M White

Binary options trading courses are designed to teach you how to utilize fixed amounts and know your potential returns or losses before you purchase. To make a trade, investors predict long or short on any financial product against a fixed expiry limit. You will also learn that one drawback to binaries includes the unavailability of an asset being traded or sold before the expiration time. Learn to receive a good payback in a short amount of time by learning how to be savvy enough to predict the correct up or down price.

Courses are often divided into many easy lessons.

· Find a reputable broker. There are many brokers online and in brokerage houses. Do watch out for brokers who offer to teach about trading in binaries, but demand high fees. It is possible to trade without broker involvement.

· There are distinct times during the day, week or month when you should start your trades. Looking for underlying assets require understanding characteristics. Set courses will teach you how to deal in assets in specific time slots and whether you should be spontaneous or look for options that are more long term trades.

o Stocks have time intervals of about six hours on a daily basis. Learn how to monitor when stocks are moving. This knowledge will help you predict the price and expiry times.

o Commodities are generally handled between 9:00 am and 2:00 pm EST. Trading before or after these times will prove to be expensive.

o Currency markets are available 24/7, but specific foreign currencies will only be viable during particular time zones.

· Courses will teach you how to use cross market assets. You will learn the risks involved in movement and volume of assets. Learn how to research assets, determine what asset is actually a better trading option, and discover how to read trading charts to compare assets.

· Learn about pivot points. These are tools for binary options trading that teach you how to use price actions at every level of resistance and support. Follow the teachings of advanced traders to learn how to avoid making false predictions. Before using pivot points practice on demo platforms.

· Before trading in binaries, learn how to postpone expiry times. If you extend the expiration time of binaries you have a better chance of your prediction being realized. Using Roll forward options can be employed when you see that you will definitely lose your investment. Roll forward should only be used in emergencies and with broker permission. Your particular broker may require a fee to extend the expiry time.

Stay abreast of the financial, commodities and stock markets as well as current affairs to help maintain your investment when trading in options. Use a reliable broker who will provide you with the best tools for binary trading. You will lose less if you learn to employ a good technical analysis of the trade, understand the market and comprehend the platform you are using. You can learn these lessons on your own, but taking a binary options trading course will set your feet on the right path.

About the Author: For more information, visit http://www.binaryoptionsexperts.com/affiliate where affiliate marketers are invited to sign up for a free account and get started marketing & making money right away! For help with your content and Internet marketing, visit this virtual assistants site.

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What Are Binary Options Trading?

Submitted by: Chris Carter

Binary options trading is a very exciting potentially high risk high reward form of trading options. One of the draws to binary option trading is that in the time that it takes most contract options to expire usually one hour, you can make a substantial return on your investment. Exciting for some but may be too risky for others given the different types of personalities of investors. Nevertheless whether you are a conservative or a risk taker binary option trading can be exciting and lucrative.

Before you can understand how to trade binary options you must first have an understanding of exactly what a binary option is and how it works. Simply put a binary option is when a trader purchases a contract on an underlying asset and tries to predict whether the assets value will increase or decrease over the life of the contract. If the value of the asset increases at the end of the contract you will be considered in-the-money and if the value has decreased at the end of the contract you will be considered out-of-the money. And just for the record I'm sure that the phrase in-the-money is much more appealing to you and is fairly self-explanatory.

Here for example is how it may work. Let's say for the sake of this example that you are an online trader. You would go to one of the many binary options brokers websites and select an asset that you are interested in. You would then find the contract on that particular asset, purchase either a call contract if you believe it will end higher or a put contract if you believe it will end lower. A majority of binary options have an initial starting length of one hour. You can purchase binary option contracts generally up to 5-15 minutes before they expire but the majority start at one hour in length. Within that one hour time span your asset will most likely fluctuate up and down in value (price) but this has no relevance on whether you end up in the money or out of the money. The only thing that matters is the actual value of the asset at the expiration of the Contract.

When your contract matures or expires if you’ve selected the correct option you will be considered in the money. Most ROI’s (Return on investment) for binary options range between 150% up to 185% of your initial investment. Here's an example for you. Let's say you purchased a call contract for $500 on a new hot tech company currently at $85 per share with a one-hour maturity date and a 160% payout. If at the expiration of that contract this new hot company was at $86 you would be in the money and would receive a return of $800. That's a $300 return on your investment in a one-hour span. Can you see how this can excite your everyday trader? Obviously there is risk to every investment and you could have just as easily finished out of the money with no return on investment and a majority of your initial investment would be lost. You must due your research in order to make educated investment decisions.

Either way you view binary option trading it is a very exciting form of trading. Whether you are a part time recreational trader or a full-time investor, binary options trading can be very lucrative at any level of experience.

About the Author: Are you looking for more information regarding Binary options trading ? Visit http://www.binaryoptions101.com/ today!

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Can You Make a Living Trading Options

Submitted by: Jason Ng

Can you make a living trading options? In fact, has anyone ever made a living just trading options?

This is a question that a lot of beginners who has yet to start learning about options asked me. In fact, for some of them, it seems like being able to make a living out of solely trading options is the only motivation for them to learn it in the first place.

Well, having traded options for more than fifteen years, I regard myself a professional options trader and I would say the possibility exist for making a living out of only trading options if you are really good at it. However, as a responsible financial adviser, the golden adage still goes, Never Put All Your Eggs In One Basket.

The right way to financial stability, security and freedom is to make sure you have multiple streams of income. Nobody should depend solely on their job income for their livelihood as the risk of retrenchment always exists. Nobody should depend solely on real estate rental income for their livelihood as the risk of default on payment and non-rental exists. Likewise, nobody should depend solely on options trading for their livelihood as the risk of the market making an unexpected move that wipes out short term gains exists. There are no perfect ways of making money and that is why we DIVERSIFY!

While it is possible to make your main income through options trading when you get really good at it, you will still need to augment your income with other residual sources such as real estate rental or even your job income in order to hedge against risk. Yes, financial stability is a science and an art which requires effort and time to get right. There is no shortcut and no quick fix. There isn’t a single method of making money which could allow you to rest on your laurels for the rest of your life. That is why the super rich still spend so much time making money and investing their money.

Personally, while I make my main income from options trading, I actually have about thirteen other streams of residual income to help me through the tough times such as the 2008 market crash which caught me somewhat by surprise and I wasn’t able to react fast enough on my options trades to avoid initial losses. If I had not my other sources of residual income, I would have gone without food and would have defaulted on my mortgages during those few tough months when I didn’t make an income from my options trading at all.

Yes, all means of making money have their ups and downs. There are no perfect investments. As such, even though it is possible to make a living from options trading, my advise is that you should treat options trading as another weapon in your arsenal to financial freedom and security. Every mean of money making that you learn gives you that edge and allows you to survive under more market and economic conditions.

To learn more about how you can profit with options trading under all market conditions, visit our Options Trading website at Optiontradingpedia.com .

About the Author: Jason Ng is the Founder and Chief Option Strategist of Masters 'O' Equity Asset Management and author of Optiontradingpedia.com and Futurestradingpedia.com. Learn more about Options Trading and Futures Trading.

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Call And Put Option: Option Trading Basic Fundamental Theory

Submitted by: Alexander Chong

It is very common that stock is transacted in blocks divisible by 100, which is called a round lot.  A round lot has become a standard trading unit on the public exchanges for quite sometime ago. In stock market, we have the right to buy and sell an unlimited number of shares as long as there are people are willing to sell and we are willing to buy at the price that the seller has fixed. Usually, for a brokerage firm, they set their commission for a transaction for minimum 100 units of share at a certain price. If we buy less than 100 units of share, they still impose us this commission. For an example, if we buy 100 units share and pay the brokerage firm USD 30 for the buy and sell transactions, they also charge us that amount: USD 30 also, if we only buy and sell 1 units of share. The amount of commission that the brokerage firm charges for the stock transaction is varied from one and other. Some brokerage firm may charge less but they require you to trade a lot in one transaction. So, each unit of option is representing 100 units of share.  

In fact, there are two types of options that are call and put option. Call option gives its owner the right to buy 100 units of share of a company at a specified price that has been agreed between the call option owner and the seller within certain period of time. So, within this period of time, if the stock price goes up, the call option price will also go up and vice versa. The second type of option is put option. This option gives its owner the right to sell 100 units of share of a company at a specified price that has been agreed between the put option owner and the seller within certain period of time. Put option seems like the opposite of call option. If the stock price goes up within this period of time, the put option price will go down. Either call or put option can be bought or sold. As long as there are people willing to sell, there will be people willing to buy. There are four permutations that are possible exist during the transaction of an option. The first one is buying a call option meaning that buy the right for yourself to buy 100 units of share. Second is selling call option meaning that sell the right to buy 100 units share from you to someone else. The third one is buying a put option meaning that buy the right for yourself to sell 100 units of shares. The last one is selling a put option meaning that sell the right to sell 100 units of share to you to someone else.    

 

The other way to make these differences clearer is always remember that the call option buyer hopes the stock price will go up and the put option buyer looking for the price per share to fall. For the opposite side, a call option seller is hoping the stock price will maintain or fall. Whereas, put option seller is hoping that the stock price will go up. If the option buyer no matter dealing with the calls or puts option is correctly predicting the price movement of the stock, then they will gain profit from their action. For option, there is another obstacle we have to face besides estimating the direction of the stock price movement. This obstacle is that the change of the stock price has to be taken place before the deadline of the option. As a stockholder, we may be able to predict a stock’s long-term prospects by waiting for a long-term change of the stock. However, for option holder, we may not have that kind of opportunity. This is because options are finite; they will lose all their value within a short period of time, usually within a few months. However, it has long-term options that can last up to one to three years. Due to this limitation, time will be an important factor to determine whether an option buyer can earn a profit or not.  

Foremost, option is granting the buyer an intangible right to buy or sell 100 units of share at an agreed price between the buyer and seller of the option. Therefore, option is just an agreement regarding to 100 units of share of a specific stock and to a specific price per share. Therefore, if the buyer buys an option at the wrong timing, then, the buyer will not able to make any profit. Wrong timing means that the stock price does not move or does not move substantially when the deadline has arrived. When we buy a call option, it seems like we are agreeing that we are willing to pay the price that being asked to acquire a contractual right. The right provided that we may buy 100 units of share of stock at a specified fixed price per share, and this right exists at the time we purchased the option until the deadline of the option. Within the time we purchased the option until the deadline of the option, if the stock price goes up more than the fixed price indicated in the option agreement, this call option will become more valuable. Just think that we buy a call option that granting us the right to buy 100 units of shares at the price of USD 70 per share. Let said before the option deadline, the stock price has gone up to USD 90 per share. As an owner of this call option, we have the right to buy 100 units of share at USD 70, which is USD 20 less than the current market price. This is the situation when stock market price is more than the fixed contractual price indicated in the call option contract. In this example, we as buyer would have the right to buy 100 units share, which is USD 20 less than current market price. Although we own the right to do so, we may unnecessarily to execute our right. For an example, how about if the stock price has gone down to USD 50. We would not have to buy shares at the fixed price of USD 70 and we could select not to take any action.

About the Author:  Alexander Chong Author of “Workable Option
Trading Strategies” http://www.makemoneystocks.com/

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Contract Differences Between Employee Stock Options and Standard Exchange Traded Call Options

Submitted by: Dr. Brent Lundell, PhD, MBA

Stock options can be used to both protect and create profits for typical investors. For example during the dot.com bubble of the late 1990s one of the owners of a major internet company purchased put options to protect against a stock value decline. He kept these positions in place. After the collapse he made over a billion dollars by exercising his puts and purchased an NBA team. 

In contrast to purchasing exchange traded stock options employees can acquire employee stock options offered by their company. These options provide the ability to purchase stock can be acquired before or after the stock has been taken public and can be quite valuable because stock can be purchased often at a discounted price compared to current market prices. For example one Microsoft employee's net worth exceeded a billion dollars a few years ago simply from acquiring as many employee stock options as possible and exercising those options. 

The following lists general differences between employee stock options and standard exchange traded stock options: 

1. Category: Exercise Price 

Employee Stock Option (ESO): 

• Non-standard. 

• Usually current price of stock when issued. 

• Grant price may be lowest point of 60 days. 

Standard Call Option: 

• Price and or market set by seller. 

• Expires on specific date. 

2. Category: Quantity 

Employee Stock Option (ESO): 

• Determined by employer employee contract. 

Standard Call Option: 

• Sold in round lots of 100. 

3. Category: Vesting 

Employee Stock Option (ESO): 

• Initially X number of shares is granted an employee. 

• Employee may get all the shares at once (“cliff vesting”) or may get all shares staggered, in equal or varying amounts, over time (“graded vesting”). 

Standard Call Option: 

• None required. 

4. Category: Events 

Employee Stock Option (ESO): 

• Some events may need to occur for options to be available. 

• Events may include stock reaching X price, a public offering, or X percent profit earned, or  performance goals. 

Standard Call Option: 

• For call option to be valuable the underlying stock must reach or exceed a set stock price called a “strike price.” 

5. Category: Duration 

Employee Stock Option (ESO): 

• Maturity is determined by the employee-employer contract. 

• It is not uncommon for options to mature from five years and beyond. 

• Must be exercised or they expire on a predetermined date. 

Standard Call Option: 

• Standard call options have expiration dates after which the option has no value. 

6. Category: Non-Transferable 

Employee Stock Option (ESO): 

• Usually not transferable. 

Standard Call Option: 

• May be sold at any time before expiration date. 

7. Category: Over-the-Counter 

Employee Stock Option (ESO): 

• Not sold over-the-counter. 

• Contractual agreement between employee and employer. 

• Employee and employer settle contract between them. 

Standard Call Option: 

• May be sold at any time before expiration date. 

8. Category: Tax Issues 

Employee Stock Option (ESO): 

• Tax advantaged compared to standard exchange traded options. 

Standard Call Option: 

• No tax advantages. 

Types of Employee Stock Options in the United States 

Employees in the USA are granted to employees in two different forms: 

1. Incentive stock options (ISOs) and 

2. Non-qualified stock options (NQSOs or NSOs). 

The difference between these two types of options lies in taxation. 

ESO Taxation 

The IRS has determined that “no taxable event” has occurred when an employee is granted stock options. However, depending on the type of stock option received by the employee he may or may not be taxed when he exercises his option. 

• Incentive stock option (ISOs) are not taxed when exercised as long as IRS regulations are followed. 

o ISOs must be held for over one year after the exercise date to receive favorable capital gains tax  treatment. 

• Non-qualified stock options (NQSOs or NSOs) are taxed when exercised. 

• Taxes can be minimized if options are held into the capital gains period.

About the Author: Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

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