Put and Call Option Secrets » Put Option

Stocks And Options – What’s The Difference?

admin — Sun, 10 Jan 2010 15:32:09 +0000

In the stock market industry, the trade for stocks and stock options are often interchanged and some investors may be confused between the concepts behind these types of trades. First off, you should know is that these two animals have very different characteristics from each other, and using them interchangeably can be lethal if you want to engage in the stock trading game.

Knowing the difference between these two can help the average investor diversify their portfolio by learning about stock options and opening up a brand new investment avenue and income stream.

Stocks Versus Options

By definition, stocks are actually shares of a particular company that are bought and sold at market price, a price which is in constant fluctuation. You have the liberty to sell your shares or buy more stock anytime the market is open and someone is willing to trade the stock in question. If you happen to own shares of stock from a company, you are entitled to certain rights, which includes a profit share from earnings.

A stock option on the other hand, is not the stock or share of the company itself, it is actually the rights for a certain stock. A stock option allows you buy rights (call options) and sell rights (put options) to a company stock at a set price in a certain time period. The holder of a stock option However, you do not gain the profits from the company itself.

Take note that in doing transactions for stock options, there will always be a buyer and a seller, and this may not always hold true when compared to stocks. When you sell stock options, you are actually creating a certain degree of security for the company as well as for yourself. In this way, the parties involved can make sure that money is actually made to the frequent trade that happens.

Comparing The Benefits

In comparing the benefits of trading stocks and stock options, many experts would claim that stock options might be a promising gamble for companies and individuals, especially if you have adequate experience in the trading game and can substantially use very good strategies to survive. However, the same results might not be expected if you are only a beginner.

What makes a lot of experts prefer options trading is usually because in this particular trade, no matter what would happen to the underlying security, an option buyer cannot lose more than that of the initial price paid for the rights. Therefore, in trading options, there are fewer risks involved on the part of the buyer, especially when it comes to the possibility of losing a lot of money. And it may even give promises of profitable gains.

But on the other hand, the seller may experience greater risks. There may be a possibility that one has to deliver or take deliveries of the stock shares. Unless the option is actually covered by a different option, then the seller may end up losing much more than the stock option’s original price.

And so, if you are not well skilled and knowledgeable about how you can prevent severe losses, then the best way for you to play the stocks trading game is to stick with the more traditional trading of stocks as this can be more straightforward and less confusing to beginning investors.

However, if you believe that you can manage options trading, you may garner promising positive results. Just make sure that you take the time to understand concepts and strategies behind stock options before you actually start trading.

More articles, tips, free ebooks and software for investing can be found at http://www.stockmarketbot.com

Options Are Too Risky – Only Crazy People Invest in Stock Options

admin — Thu, 10 Dec 2009 02:26:23 +0000

Who decided that options are too risky for the everyday investor? More importantly can somebody please explain why options are too risky? After years of research I have finally come to understand that there are 3 types of people that can be held responsible for the Myth that options are too risky. Who?1. Financial Planners
2. Stock Brokers
3. Taxi Drivers
Is it possible for the uneducated investor to lose lots of money if they trade options? Yes of course they can, first of all the uneducated investor can lose tons of money using any trading instrument and secondly options are highly leveraged so if used incorrectly then they will increase your losses. So if this is the case then why an I saying that trading stock options isn’t risky?
The first thing that you must realize about stock options is that they were actually invested to reduce or manage risk. The whole idea of buying a put option to hedge you stocks is basically another form of insurance. When looking at your portfolio risk management options buying puts to ‘insure’ your stocks is one of the most conservative investment strategies that you can implement.
On the other hand selling call options on stocks that you already own (covered calls) is another incredibly conservative stock market strategy. This strategy actually increases your downside protection, so when used correctly the myth that options are too risky is simply not true. Of course if you start writing naked calls or naked puts then your risk levels are going to seriously increase but when used correctly options are an amazing risk reduction tool.
Let’s have a look at why financial planners, Stock Brokers, and Taxi drivers are giving Options such a bad name.Financial Planners: If you go to your financial planner and say that you would like to include options in your trading strategies then they will almost definitely tell you that it is a very bad and risky idea. Why? Simply because 99% of financial planners wouldn’t have a clue how to use them. I recently spoke to a financial advisor who admitted that her entire financial planning degree only had one chapter on options and it was completely theoretical information. In their entire course there was not one bit of practical information about how to use options. So considering that most financial planners don’t actually know what stock options are let alone how to use them is it any wonder that their typical response is negative. Remember human’s beings fear change and looking stupid.Stock Brokers: Surely Stock brokers don’t think that options are too risky? Aren’t they meant to be professional stock market investors? Unfortunately most stock brokers are exactly that ‘STOCK’ brokers not ‘OPTION’ brokers. To become a legal options broker there are additional courses that you need to complete so most stock brokers aren’t actually allowed to give you ‘option’ advice. Put yourself in their shoes for a minute – if a client came to you and said “What do you think of buying Options” then you are faced with two choices
1.Tell them that is a great idea but unfortunately you will need to take all of your money out of our accounts and go to another broker who is legally allowed to trade options, Good Luck with your investing.
2.Or you could tell them that options are too risky and you really should just stick to managed funds and stocks.
So what answer would you choose?Taxi Drivers: Obviously this is a little bit of a joke but the point I am trying to make is that everybody seems to think that trading stock options is too risky. It is extremely important to remember to make up your own mind about investment strategies, whatever you do don’t take advice from a taxi driver about wealth creation.
“the most expensive advice you will ever get is free from poor people” Kurek Ashley
So are Options too risky? If used incorrectly yes but perhaps the question you should ask yourself first is ‘what are stock options’? Before you dismiss something as being too risky or scary make sure you try to understand what it actually is and how it works. There are plenty of free resources on the internet so do some research and make up your own mind about stock options. The last thing you want to do is ignore something just because that is what everybody else thinks. After all are these people achieving the results you are after or are they still driving taxis?

Call and Put Option: Option Trading Basic Fundamental Theory

admin — Sun, 29 Nov 2009 14:36:49 +0000

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.

How Option Trading Profit In Any Market Conditions

admin — Sun, 29 Nov 2009 11:05:53 +0000

All stock market multi millionaires must be able to profit under any kind of market conditions. If you are able to profit only when stock markets go up, then you will find it a gargantuan task to ever have any sustainable success, much less become a stock market millionaire.
Yes! It is possible and easy to profit whether stocks are up, down or sideways using option trading. If the ability to trade all kinds of market conditions is the doorway to becoming a stock market millionaire, then option trading would be the very key.
In this article, I will outline some common ways by which you can profit from all kinds of markets by option trading.
Simple Option Strategies for Up Markets
Buy Call Option – You could buy the same number of equivalent stocks for a fraction of the price using call options and profit when the stock goes up. If the stock should crash, you will lose only the small amount you put towards buying the option instead of the whole amount that you would have put towards buying the stock itself.
Sell Naked Put Option – Instead of buying call options, you could sell short put options thereby pocketing the entire amount you made on selling the put options if the stock should go up.
Bull Call Spread – A bull call spread consists of buying call options at the money and selling short out of the money call options of the same month. The benefit of this strategy is that you profit when the stock goes up and profit also when the stock stays sideways!
Simple Option Strategies for Down Markets
Buy Put Option – Instead of shorting stocks and risking a margin call, you could simply buy a put option. Buying a put option is exactly the same as buying call options except that you profit when the stock goes down instead of up.
Sell Naked Call Option – Instead of buying put options, you could sell short call options thereby pocketing the entire amount you made on selling the put options if the stock should go down.
Bear Put Spread – A bear put spread consists of buying put options at the money and selling short out of the money put options of the same month. The benefit of this strategy is that you profit when the stock goes down and profit also when the stock stays sideways!
Simple Option Strategies for UP or DOWN Markets
Straddle – A straddle consist of buying a call option and a put option at the same strike price on the same stock. This strategy allows you to profit whether the stock moves up or down and is excellent when you are certain that a stock will move greatly soon but isn’t sure which direction that may be.
Strangle – Similar concept to a straddle but buys out of the money call option and put option instead of at the money ones in order to reduce the cost of the position.
Simple Option Strategies for Sideways Markets.
Covered Call – If you are holding on to a stock that is moving sideways, you could collect “rental” out of it by selling the call option of that stock month after month and pocket the whole amount of the sale should the stock remain sideways.
Short Straddle – Instead of buying call options and put options as described above in a Straddle, you would sell short them instead. In this way, you create an option position which profits when the stock remains sideways.
Are you amazed now at how easy it is to profit in any kind of market conditions by option trading? These are only very few of the many more option trading strategies that you can use to your specific portfolio needs. To learn more about what option trading and stock options are for free, please visit http://www.OptionTradingPedia.com .

Option Trading Strategies – a change from buy and hold

admin — Thu, 26 Nov 2009 02:56:02 +0000

A portfolio of stocks and shares is a standard investment strategy that exactly fits the bill in the search for a source of passive income, which is generated from the annual earnings payout from the shares. I am not a professional advisor, so this is just a personal opinion, but I do not think that a buy-and-hold portfolio is a safe strategy for your hard-earned cash right now.

If you are going to invest in the stock market, I believe you need a much more hands-on approach than buy-and-hold. Even so, a few hours portfolio management per week beats a full-time job. With a more active approach, investing in the stock market can be a wealth-building programme, not just a place to park your existing funds with a view to a slightly better return than the banks will produce.

There are many different approaches to managing your investments rather than buy-and-hold. One area worth looking at is options trading – when you buy options, you are not acquiring the stocks themselves, you are buying the right to make an agreed trade at some point in the future. This can be used when the stock values go up OR down, by buying the right kind of option. There are 2 basic kinds of options:

Call options – these give you the right, but not the obligation, to buy shares at an agreed price on or before an agreed expiry date. If the actual price of the shares rises above the price agreed in the option, then the holder of the option can make a profit by buying the shares at the option price, and immediately selling them at the higher market price. But there is no need to do this buy/sell transaction, since the option itself has an intrinsic value in this situation and can itself be traded.Put options – these give you the right, but not the obligation, to sell shares at an agreed price on or before an agreed expiry date. If the actual price of the shares falls below the price agreed in the option, then the holder of the option can make a profit by buying the shares at the market price and immediately selling them at the higher option price. Again, there is no need to do this buy/sell transaction, since the option itself has an intrinsic value in this situation and can itself be traded.

Because options values vary with the margin between the market price and the agreed option price, the option prices change by a much greater percentage than the prices of the shares themselves. It is not at all uncommon for options to change 50% in a week – 3 of my last 5 trades have gained over 50% in a week.

There’s a lot to learn about option trading, but for the small investor I recommend taking a look at this as an active investment strategy in preference to the passive buy-and-hold approach.

Bullet Advisory Indian Stocks-how to Buy Nifty Call-put Option and Calculate Profit or Loss

admin — Wed, 25 Nov 2009 15:00:57 +0000

Bullet Advisory Indian Stocks-how to buy Nifty Call-Put Option and calculate profit or loss

Everyday we listen about Nifty Option price closing up or down,Call Option,Put Option, market bullish or bearish .We wonder how to trade in Nifty Option and earn profit with limited loss and unlimited profit. What are the points we have to keep in mind while trading Nifty Option, how to calculate the profit and loss.First of all we have to determine the direction of the market whether market will be up or down.We can take the position in Nifty Option in the expected direction bullish or bearish.If we are bullish then we can buy Nifty Call Option and if bearish then we can buy Nifty Put Option.What trade we can execute and what would be our position in terms of profit and loss are explained below with examples.

If current price of Nifty is 2900 and Nifty Call Option Strike Price 3000 and Put Option Strike Price 2800 in January is 100=00 INRs and last date of expiry is on nth January. What trades we can do in Call and Put Option of Nifty and what will be our profit and loss position is as stated below.

If bullish we can Buy Nifty Call Option

(1)Buy Nifty Call Option January Strike Price 3000@100 INRs. Lot Size 50

Premium Paid=100*50=5000 INRs.

Maximum Loss=5000=00 INRs.

Maximum Profit=Unlimited

Break-even Price=3100

We can sell Nifty Call Option which we have bought anytime till last day of expiry i.e., nth January and can book profit or loss. If we do not sell Nifty Call Option we have bought till lasts day also then our trade will be automatically squared off at the settlement price of Nifty on last day of expiry decided by the exchange.

.Different Possibilities with our Nifty Call Option Buy position

(1) Nifty Call Option price 140 and sold before expiry then

140-100=40*50=2000.00 INRs. Profit

(2)Nifty Call Option price 60 and sold before expiry then

100-60=40*50=2000 INRs. Loss

(3)Nifty settlement price 3200 and we have not sold Nifty Call Option till expiry then

3200-3000=200*50=10,000-5000=5000=00 INRs. Profit

(4)Nifty settlement price equals to or below 3000 and we have not sold Nifty Call Option till expiry then

5000=00 INRs Loss

This is the maximum loss we can have even if Nifty falls to any level beyond 3000.

(5)Nifty settlement price 3100 and we have not sold Nifty Call Option till expiry then

3100-3000=100*50=5000-5000=0.0 INRs. No Profit No Loss

If bearish we can Buy Nifty Put Option

(1) Buy Nifty Put Option Strike Price 2800.@100 INRs. Lot Size=50

Premium Paid=100*50=5000.00 INRs.

Maximum Loss=5000.00 INRs.

Maximum Profit=Unlimited

Break-even Price=2700

We can sell Nifty Put Option bought anytime till last day of expiry i.e., nth January and can book profit or loss.If we do not sell Nifty Put Option we have bought till lasts day also then our trade will be automatically squared off at the settlement price of Nifty on last day of expiry decided by the exchange.

Different Possibilities with our Nifty Put Option Buy position

(1) Nifty Put Option price 140 and sold before expiry then

140-100=40*50=2000.00 INRs. Profit

(2)Nifty Put Option price 60 and sold before expiry then

100-60=40*50=2000 INRs. Loss

(3)Nifty settlement price 2600 and we have not sold Nifty Put Option till expiry then

2800-2600=200*50=10,000-5000=5000=00 INRs. Profit

(4)Nifty settlement price equals to or above 2800 and we have not sold Nifty Put Option till expiry then

5000=00 INRs Loss

This is the maximum loss we can have even if Nifty rises to any level beyond 2800.

(5)Nifty settlement price 2700 and we have not sold Nifty Put Option till expiry then

2800-2700=100*50=5000-5000=0.0 INRs. No Profit No Loss.

What is the advantage of buying Option compared to Future.Maximum loss is fixed and predefined.We cannot lose more then the premium paid to buy the Option under any circumstances and it is known to us before we trade.We can square up the Option position anytime after buying just like Future.We have to pay only amount of premium and not the margin which is required for buying future.

Reduce Your Risk With Stock Options

admin — Tue, 24 Nov 2009 14:29:12 +0000

Options trading, and specifically writing options, is normally poorly understood, and more often than not, poorly communicated. This is why most people dismiss it as too complicated or too difficult. So many traders are put off trading in options purely because of lack of knowledge. But once educated in this area you will find you can actually work options to your favour to produce regular income and reduce your risk.Options are just one type of Derivative. They’re a financial instrument which has another asset as its underlying base and includes futures and warrants. They provide exposure to shares but they deliver greater leverage and enable you to trade bullish or bearish markets and make money regardless of the direction the market is trending.People trade options for the leveraged factor. For a minimal capital outlay you can generate great profit, but leverage is a double-edged sword. When you win, your profit can sometimes be ten times the amount the underlying share has moved, but when you lose your loss is magnified to the same extent. There are two types of options, call option and put option. An option is a contract written by a seller that conveys to the buyer the right, but not the obligation, to buy (in the case of a call option) or to sell (in the case of a put option) a specified quantity of shares at a specified price (strike price) at or before a certain date in the future. In return for granting the option, the seller collects a payment called the premium from the buyer. A call option will rise in value exponentially when the underlying share rises in value and a put option will rise exponentially when the underlying share decreases.You will hear plenty of horror stories about people’s experience trading options. Some of these stories may be based on truth, so it is important to know why people are sometimes repelled from trading options after being introduced to the market. Usually they have only employed a buying of options strategy, which is called directional trading and requires a high level of concentration and knowledge about where markets are heading because if your stock goes the other way to which you intended you will be at a loss, a leveraged loss at that also. More investors lose money when adopting this buying of options only strategy. It is believed to be up to 80 – 90% of people lose money when buying options for directional trading. This is because the buyer needs their option to move further in-the-money to make a profit, and if it doesn’t they will be looking at a loss. In-the-money means the share price has to go up for a call and down for a put. This is why it is imperative you explore the other side of options and see the advantage of being the seller. When you have sold another trader an option, you have put yourself in the enviable position of having sold a depreciating asset. The value of an option decreases exponentially the closer it gets to expiry, it will lose two thirds of its value in the last third of its timeframe. Once an option has been purchased, if it is out-of-the-money (share price is below option strike price with a call option and above with a put option) at expiry, it will be worthless. The seller will have the money in their bank account and the buyer of the option will be holding a worthless asset. The buyer’s view of the option moving further in-the-money has failed.There is one advantage though with buying options, but it is only when buying a put option to protect shares you already own. If you own 1000 shares for example you can buy put options to insure those 1000 shares at a strike price at or close to your purchase price. What that means is, if the share price is below your strike price at the time of expiry, you can automatically have those shares sold at your nominated strike price.When used correctly options can definitely give you regular income as well as protection for your capital thus reducing your risk. But when used incorrectly, can quickly demolish your trading account.