Option contract:
An Option can be defined as a financial instrument or nonlinear contract that is tradable.
This contracts consist of price value which is profitable or non-profitable depending on its asset value with respect to a period of time. It's exercise is dependent on a specific date expiration.
Option trading allows a trader to speculate or hedge on a financial contact or stock.
Option contract consist of a buyer and a seller, the buyer is given the opportunity to purchase the rights granted by the contract. This is defined as premium.
Investors use option contract which are tradable to speculate the rise or fall in price of an asset within a period of time in the future. it's gives traders the opportunity to buy or sell an asset at a definite price and date.
Option trading allows trader's to speculate the direction of price of a particular stock, what it would be in the future.
Option trading gives you the access to buy a security at a specific price and date, also allows you to sell the security at a future date with respect to price.
Options can be viewed and understood as a financial derivative because it's value is determined by another asset. An Option contract value is determined by its stock price.
Option trading allows traders to make decisive approach towards investing in an asset depending on change in the price from it's current value.
The increase or decrease of the price of stock option or asset is taking into consideration by an Option trader.
The value of an option asset increase and decrease in price at a specific date determines it's profitability.
Things to note about option trading:
Option trading consist of call option and put option.
- Call option:
A call option involves buying a security at a predetermined price with respect to a specific date.
The call option exercise a bullish buying and a bearish selling characteristics.
A call option allows the holder to buy a stock at a predetermined price on or before it's expiration date.
- Put option:
A put option allows a trader to sell security at a future date with a stated current selling price.
Put option exercise a bearish buying and a bullish selling characteristics.
Put option gives it's holder the access to sell stocks at a predetermined price on or before expiration.
- Strike Price:
A strike price can be defined as a pricing system that is established or decided ahead of time at a specific date. It is a predetermined price.
The price to purchase an Option is determined by its stock value. This consist of the strike price and current price of the asset.
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Option Contract:
An Option contract consist of 100 shares of the underlying security. An option trader can pay a premium charge for each one of the shares.
One option contract cost can be calculated by multiplying the unit cost and 100 e.g If each option contract cost 54 cent per contract , to buy one option contract is 0.54 cent * 100 = $54
A trader needs a well defined strategy to trade options. This involves trading volume and open interest.
