If you have experience trading stocks or bonds, you should consider adding the practice of trading options to your portfolio of investment tools and techniques. Options trading provides more safety, methods, and flexibility for applying specific strategies in various market conditions, with a view to reap additional investment revenue without additional risk.
There are certain things that you ought to be aware of before trading options. An option can be called a derivative, the meaning of which is that its value is predicated on a principal asset. These assets may be stockpiles; indexes or it can likewise be ETFs.
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Trading of these assets involves handing over the power to acquire or trade a specific stock at a specific cost within a definite window of time. Options in general help the investor to purchase the stock at a reduced value and to extend his profits from the stock’s rise of fall in price.
Options technical trading jargon
If you obtain an option that enables you to purchase a certain stock, it is called a call option. If you obtain an answer that allows to sell a stock, this is referred to as a put option. There are also both call and put options, where the trader gets options to both buy and sell a stock, both of which have predetermined prices and a particular date.
By purchasing an option you’ve got the right, but aren’t obligated to do so, to purchase a particular stock at a certain price. This set price is called the strike price. The most difficult aspect of all this thing is being able to find out what all the different terms, or the jargon, means.
QUESTION: How do I place option calls/puts?I kinda know what options mean but not fully sure how to buy/place an order. I am looking at Oil at $30 right now and think it will be higher by summer 2009, so how do I place calls on that? Explain in the simplest way you can because I know if I emailed my broker he will reply in technical jargon
The first thing you need to do is go from a "kinda know what options mean" state to an "absolutely know what options mean" state. Trying to trade derivatives when you do not understand them can be very painful financially. The second thing you need to do is decide which kind of options you want to trade. The answer by "hugh h" assumed you wanted to trade options on futures. If that is what you want to do you need to have an account authorized to make such a trade. (I know my broker is not authorized to enter such trades, so I would have to switch brokers. That is probably not a problem for you but you should check.) You should also have to demonstrate you understand options and futures. There will also probably be some minimum account size requirements. You may prefer to trade options on something that trades like stocks, like "OIL" on the NYSE. You can get a description of exactly what that is at http://finance.yahoo.com/q/pr?s=OIL Once again, you would need to have your account authorized to trade options, but the process should be simpler. As part of your decision making you should check the specifications. For example, in the example "hugh h" specified a premium of $7.53 per barrel which has to be multiplied by 1,000 barrels to get a total premium of $7,530. Options on "OIL" are for 100 shares so you only multiply the premium by 100 instead of 1,000. Once you understand options, you have decided which type of options you want to trade, and your account has been authorized to trade those options, and only after all those steps are done, you will be ready to learn how to place an options order. The answer by "hugh h" gave you details about placing an order for an option on the future contract. Most brokerages allow you to enter option purchase orders for stock and ETFs through an online transaction similar to the transaction you would use to buy stock. For what it's worth, you should also understand that when you buy an option you need to base your decision on more information that you "think it will be higher by summer 2009." It is perfectly possible to buy a call option, which is bullish, have the price of the underlying go up, but still lose money on the option because of time decay and/or a decrease in implied volatility. If you do not understand everything I said in the previous sentence, I strongly encourage you to avoid trading any options until you learn more about them. One good way to learn more would be to read a good book such as "Option Volatility & Pricing" by Sheldon Natenberg.
First, you need to read and learn the proper terminology, then learn about what oil is traded as (what type of physical and time frame) and finally, about the whole oil industry. Then talk to your broker…. But, yes, we all know it's going up next summer – and have already beaten you into the market – so – what do you want to do now?
First of all you don't "place a call" you call/input in the order. If you believe that crude oil on the NYMEX will trade for more than $30 / bl then you would look to buy call options. now you have to decide which month, crude oil is one of the few contracts that trades every month, let's use July 2009 for example. Now you must decide the "strike price" of the call option ( in this case the higher the strike price the less expensive), lets use $55 for example. Now decide on a price, a quick look at http://www2.barchart.com/optqte.asp?sym=CLN9&mode=d shows us that it settled at 7.53 which is $7,530 and it would expire June 17, 2009 giving you 180 days. You would call in your order as " I would like to buy 1 July Crude oil $55 call option for 7.53, day order" of course the best thing to do first is to get your broker to call the market for a bid/ask quote for a more accurate price.
For those of us that take years of hard work to understand & profit from Options…….. your question seeks an easy answer… where there is none. Once you have a working idea of the "Greeks" (technical jargon, that you must know)…….. you can start to explore Options & Options Strategies. Here's a good place to start; http://www.redoption.com/education_option_basics_m.php
Oil is traded as future.. and not option. You need to be doing futures contract or find an stock that would go in parallel with oil.
However, when you’ve become familiar with the technical terms, you’ll discover that the true fundamental knowledge that you need is to find out which mode that you think the stock price will set off in the future. MACD indicator is also a useful tool in this regard.
The hardest part of options trading is understanding all the jargon. But once you understand all the technical names, you will soon discover that basically what you really need to find out is which way you believe that the stock price is going to go in the near future. Once you get an idea what’s going to happen, then all you’ve got to do is use the right option trade to profit. For instance, if you expect a stock’s price is going to increase, then you would purchase a call option on that stock.
Now remember all an option is a contract between a purchaser and a vendor. In a contract both parties are required to agree upon certain things. One of the first things that the two parties need to agree upon is the strike price. Simply put the strike price is the price in an options contract at which the underlying instrument is bought of sold if the options is exercised. So the purchaser of the options contract reserves the right to buy or sell the underlying instrument for a certain price or strike price. Think of it as the price you’re locking in for a premium.
Once you know and get an initiative on what is actually going to happen, then all you got to do is to take a proper action to accumulate a finite profit. Take an example where you’re expecting a stock’s value to increase, and what you’ll do is to have a call option on that particular stock. So stock option trading is something that one only tries when he’s become very confident.