What is Option Trading |
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| In Option Trading it has been agreed to sell stock at a fixed price, either before or after a set date. In option trading the buyer is given the option to either buy or not to buy whereas the seller is not given a choice, he has to sell the stocks to the buyer. |
| In simplistic terms, option trading is where a buyer wants to buy stocks from a company but does not have the finances to do it. He could make a deal with the seller, creating a fixed price settlement for the stock and also a grace period of up to six months. The buyer then watches the stock value, and should it rise, will still be able to buy the stock at the price agreed with the seller. |
| Option trading consists of two types; Call option and Put option |
| Call options are usually used with reference to stocks; however, they can be used with bonds and financial assets too. Call options is where a contract is undertaken between a buyer and seller enabling the buyer to buy stocks at a certain rate during an agreed time period. This contract does not obligate the buyer to purchase the stocks; it just gives him the right. |
| Put Options allows the holder to sell stock at a fixed rate, regardless of any future values it might hold. The buyer of the Put option has the right to sell his stocks, at the agreed rate, prior to the expiration date. It is also obligatory that the initial seller must buy the stocks back, should the buyer choose to sell. |
| Put Option Trading is risk limited; it allows investors to make a profit even when there is a downturn in stock values. |
| Although option trading has its advantages, one being, that the buyer can withdraw at any time and in that way, option trading is flexible, however, it also has disadvantages; the buyer will have to pay an amount in fees to secure the option, over and above the total he pays for the stock. |
| Finally, Option Trading is a relatively easy way of earning profits. It is flexible and allows for investors to make an investment without actually having any funds at the time. |
| Wise rules of Investing - Financial Planning | Investing during Bear and Bull Markets |
