Trading Options: Based Upon The Cost

What's option trading about? Basically, when trading options, the buyer (or taker) is purchasing buying rights from the seller (also known as a writer). Different kinds of option trading are available, though options on commodities and stocks as the most common. Option trading is a strategy that can be used in any market in which prices fluctuate, which typically includes any market environment.





Do you know how an option strategy actually operates? Here is an example. Say that a share is priced at $10.00 right now. You have feeling that it will rise to $12 over the course of a month. You would probably want to purchase as many shares as you can afford.
However, you are not always in a position to buy such shares, and often you will not have enough money to buy too many of them. In this example, if you had $1000 you could only buy 100 shares. This means you would gain $200 if the price went up as you are hoping. This is not a bad return but you may be wishing to make a bit more than $200 on the information you have.
The way trading options work are to pay a certain amount to each writer as an option. If the writers thinks the amount of the share will not change over the next month or so, it will stay at the original price of $10.00. If you then present him an option for .10 per share with an option to buy shares in $10.00 increments over that month, this should be something the writer is willing to do.
It's because he believes they will keep having a value of ten dollars and he will make a 10-cent per share profit on ones that aren't actually under his ownership, and he just has to unload them on you at their present price in 30 days, if you wish. That way, your thousand dollars could get you an option to purchase 10,000. Then, if the price rises to twelve dollars, you'll have made a profit of $2,000 since you have a purchase option for ten thousand and could sell them at $12,000. Now rather than ending up profiting by twenty percent, you'll see a one hundred percent gain instead.
In this way you can take the advantage in options trading. Though there are instances for you to acquire big loses in options trading. Presume the shares plunged to $9.90. This is a small drop but instead of losing $10, if you had purchased the shares, you will have your whole stake lost. Regardless of the risk implicated one must learn option trading and make use to benefit himself.

By: David Baxwell