An options contract gives the holder the right to buy 100 shares of the underlying security at a specific price, known as the strike price , up until a specified date, known as the expiration date . For example, a single call option contract may give a holder the right to buy 100 shares of Apple stock at a price of $100 until Dec. 31, 2017. As the value of Apple stock goes up, the price of the options contract goes up, and vice versa. Options contract holders can hold the contract until the expiration date, at which point they can take delivery of the 100 shares of stock or sell the options contract at any point before the expiration date at the market price of the contract at the time.
Some examples include the $SPX, which is a representation of the valuation of the stocks in the S&P 500. This would be a broad market index. The $SOX, the semiconductor index is an example of a sector index while the $OIX, the oil index is an example of a commodity related index.
You'll learn how professional option traders approach the market, including the trading strategies and risk management techniques necessary for success. You'll gain a fuller understanding of how theoretical pricing models work. And, best of all, you'll learn how to apply the principles of option evaluation to create strategies that, given a trader's assessment of market conditions and trends, have the greatest chance of success.
For the purposes of this lesson, I will only be referring to trading stock options, even though options can be traded on other securities such as commodities.
Suppose the stock of XYZ company is trading at $40. A put option contract with a strike price of $40 expiring in a month's time is being priced at $2. You strongly believe that XYZ stock will drop sharply in the coming weeks after their earnings report. So you paid $200 to purchase a single $40 XYZ put option covering 100 shares.
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Understanding stock option trading made easy. Illustrated guides on basic and advanced option trading strategies, as well as technical analysis indicators.
Options Warm-up: The Language of Options and Options' Mechanics
This functional versatility, however, does not come without its costs. Options are complex securities and can be extremely risky if used improperly. This is why, when trading options with a broker, you'll often come across a disclaimer like the following:
This section covers the basics of technical analysis and how to use technical indicators. It also contains graphical and tabular examples of some of the more popular technical indicators.
Just as you can buy a stock because you think the price will go up or short a stock when you think its price is going to drop, an option allows you to bet on which direction you think the price of a stock will go. But instead of buying or shorting the asset outright, when you buy an option you’re buying a contract that allows — but doesn’t obligate — you to do a number of things, including:
Like futures markets , options markets can be traded in both directions (up or down). If a trader thinks that the market will go up, they will buy a Call option, and if they think that the market will go down, they will buy a Put option. There are also options strategies that involve buying both a Call and a Put, and in this case, the trader does not care which direction the market moves.
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Call options give the option to buy at certain price, so the buyer would want the stock to go up. Conversely, the option writer needs to provide the underlying shares in the event that the stock's market price exceeds the strike due to the contractual obligation. An option writer who sells a call option believes that the underlying stock's price will drop relative to the option's strike price during the life of the option, as that is how he will reap maximum profit.
On January 30, 2018, Facebook banned advertisements for binary options trading as well as for cryptocurrencies and initial coin offerings (ICOs).   Google and Twitter announced similar bans in the following weeks. 
If you are looking for specific option strategies such as the Covered Call , Iron Condor or Straddle , please visit our list of Advanced Options Strategies featuring graphical examples and explanations for each strategy.
Before you begin trading options, you should know what exactly is a stock option and understand the two basic types of option contracts - puts and calls. Learn how they work and how to trade them for profits.... [Read more...]