Learn The Basics of Options Trading at Options University
Below is a MRR and PLR article in category Master Series -> subcategory Option University.
Master the Fundamentals of Options Trading at Options University
Are you interested in a career in options trading? Let Options University guide your education. If you're familiar with trading stocks or bonds, you'll find that options trading shares some similarities.
Starting out in options trading can be challenging. In essence, an option is a contract that allows you to buy (call) or sell (put) a stock or bond at a predetermined price (strike price) on or before a specified date (expiration date).
There are various options available in the market. American options can be exercised anytime before the expiration date, while European options can only be exercised on the expiration date. Generally, American options apply to stocks and bonds, whereas European options are often used for indexes.
Options contracts officially expire on the Saturday following the third Friday of the expiration month. However, since U.S. markets are closed on Saturdays, the practical expiration day is Friday.
When buying or selling an option, you have two choices: hold it until maturity or exercise it before it expires. Most investors prefer to wait until maturity. Consider this example:
Suppose you purchase an option for $1 with a strike price of $25. As options contracts cover 100 shares, the option costs $100, allowing you to buy $2,500 worth of stock. If the stock's value rises to $27 by expiration, it's advantageous to buy, as your strike price remains $25, resulting in an immediate $2 profit per share.
If the stock doesn't reach $27 or the breakeven point of $26, you might exercise the option to avoid a loss. If the stock's value falls below $26, consider a put option to recuperate some losses.
If your option's value diminishes, you can let it expire, though you must accept that your initial investment might be lost. Fortunately, options trading limits your risk to the initial purchase price.
Be aware that an option's price is influenced by asset price movements and the expiration date. As expiration nears, the option's price tends to decrease. Therefore, if you don't plan to hold an option until it expires, selling it earlier could be beneficial.
Learning the basics of options trading can be straightforward with guidance from Options University. Let us help you navigate this exciting field.
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