Stock Option Basics

Stock options can make for a valuable investment. Two parties reach an agreement for the buyer to purchase or sell 100 shares of stock. The price of this stock is predetermined and the stocks are delivered within a certain period of time.

There are different aspects to stock options that you should understand so that you can make the right decisions regarding them. Plus, you have to understand them to an extent in order to be able to make a sound investment. Luckily, a certified financial advisor can help you with this aspect if you need the help.

But no matter how much you will be involved or not involved with your stock options, you do need to understand the terminology that is involved with both stock options and futures on a single stock.

Terms

Your option class defines your right to buy or sell. For instance, put options give you the right to sell your stocks, while your call options is your right to buy.

You then have your strike price. Your strike price is the price at which the stock can be bought or sold. Note that the premium of your option is determined based upon the asset's relation to the market value. The option seller is paid a premium for taking on the risk that is associated with the obligation. The premium is dependent upon the strike price, the time remaining until the option expires, and the volatility of the asset at hand.

And, of course, you have the very important expiration date. The contracts are actually considered "wasting assets" because the options expire after a specified period of time. Once the expiration date is reached, the stock option becomes worthless. You don't want this to happen because this can be a loss for you and a loss that you don't want to have to experience. It is important to know that stock options in the U.S. expire on the third Friday of the month in which they expire. Expiration dates are quarterly, which means they are every three months.

Know that when an option expires and is deemed worthless that this is not a terrible thing. This simply means that no further action can be taken on that option. If no further action can be taken on that option, you get to keep your premium. There are certain strategies that you can use in order to profit.

The Market

There is quite a bit involved in the options market. When you are getting started in options trading, you are going to have a choice between a cash account and a margin account so that you can make your investments. If you want to use a margin account because you don't have the cash on hand at the moment to make the desired investment, you have to use your existing holdings to make the investment. If you don't have any existing holdings, this means that your only option is cash. You will also need to make a minimum deposit into your trading account.

A certified financial advisor can open this account for you and the two of you can work together in finding the right investments. Your certified financial advisor can also help you to understand your options, how they work, and will help you to determine what is best for you based on your individual budget.

Stock options can be a great investment opportunity and you shouldn't let them scare you away because of all of the terminology involved. Once you get involved in stock options basics, you will be able to develop strategies that will help you make the most out of your money so that you can receive the best return on your investment.

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