Stock Option Trading Basics

in Option

The classical definition of a stock option entails the right to buy or sell stock at a specified price, usually within a specified period of time. The stock option trader and buyer of a stock option can choose to take action on the option called exercising the option. The right to exercise has a time limit. If within the specified period of time the purchaser has the right to exercise it or to not take action and let the option expire.

There are put option and call options. The put option gives the buyer the option to sell the underlying asset. The call option gives the buyer the right to buy the underlying stock. An option trading tutorial is necessary and extremely helpful for those interested in pursuing options trading.

The options buyer may choose not to exercise the right and let the option expire. The underlying asset has value however the option expires worthless under such circumstances.

The theoretical value of a stock option can be evaluated according to several statistical models. These models, which are developed by quantitative analysts and attempt to predict how the value of the option will change in response to changing conditions. Because of these proven models, the risks associated with granting, owning, or trading options may be quantified and managed with a great precision.

Exchange-traded options form an important class of options which have standardized contract features and are traded on public exchanges. The low-cost leverage feature of options make them an extremely attractive financial instrument.

There are many indicators and tools used to predict price movement. Don't try and use all of the indicators and signals at the same time since you will never see all of them in agreement, and you will get far more information than you can process. Instead, find the ones that work best for you and your strategic style, and learn to master them. Most successful financial experts found that the best trading systems are the simplest ones.

As such there are leading and lagging indicators. A leading indicator gives a buy signal before the new trend or reversal occurs. A lagging indicator, as you may guess, gives a signal after the trend has been initiated, and trend momentum is established. In order to stay ahead of the curve, discover the Stock Options Trader and take advantage of their free 30 day trial.

Lagging indicators give a buy signal after the trend has been established whereas a leading indicator give a signal before a trend is initiated. With leading indicators there are many fake-outs. Relying on lagging indicators only would preclude one from catching large gains found early in a trend.

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Stock Option Trading Basics

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This article was published on 2010/03/28