This Article is About
typical strategies
expiration date
whole lot
Basic Options Trading Tutorial
Join 1000's of Authors at StreetArticles Today!

In this basic options trading tutorial we'll introduce the main concepts involved with option trades. Although the traders may treat this kind of security with a bit of mysticism, there really isn't a whole lot of mystery behind why leveraged trades like these are popular.

Basic Options Trading Tutorial Part 1: Terminology

Before anyone delves too deep into what is essentially derivative trades it is important to have a fundamental understanding of the terms used in the market. While most of the terms are intuitive it is critically important to not get them mixed up, because doing so can cause significant losses. We've sorted these in some reasonable order of importance.

  • Underlying Asset - the stock or other security on which a contract has been created
  • Calls - these represent a right to buy a security.
  • Puts - These represent the right to sell a security
  • Strike Price - This is the price at which a stock or asset will be bought or sold (depending on whether it is a call or put)
  • Expiration date - This is the date when the contract becomes invalid - ie when the trader loses their right to buy (call) or sell (put). Contracts must be executed on or before this date
  • Premium - The price paid for the call or put
  • Going Long - means owning the option (and paying the premium)
  • Going Short (or writing an option) means selling the call or put (and receiving the premium)
  • Execution - when a contract has been enforced, resulting in the delivery of share (of the underlying asset)

Basic Options Trading Tutorial Part 2: Basic Strategies

Given a basic idea of the terms traders use to describe stock derivatives trades it is possible to describe some simple strategies used in the market. In the vast majority of cases contracts expire without ever having been acted on (executed), most either expire worthless or are sold (closed) long before expiration. Typical strategies a trader might use include:

  • Going long a call (or put) option as a stand-alone investment
  • Writing (Going short) a put option in order to potentially secure the underlying asset at a discount to today's actual price
  • Writing a call option as a means of cashing in on a market top without actually selling the underlying security

While more advanced strategies exist that remains beyond the purview of this basic options trading tutorial. A companion options trading payout worksheet demonstrates the profit and loss characteristics of the basic contract types. While simple payout charts won't explain all of the possible systems for using contracts it does help to have a visual understanding of what makes trades profitable.

Basic Options Trading Tutorial Part 3: How the Market Functions

Trades are handled via an option broker, who passes on orders for contracts via an exchange clearinghouse. The benefit of handling these highly leveraged contracts this way is that doing so eliminates counter-party risk - ie it reduces the risk of failed trades.

Brokers are responsible for their clients maintaining proper collateral (cash or other assets) in their accounts, as it then falls on the brokers to fund the clearinghouse on any trades executed by their clients. Margin requirements vary between brokers however it is highly unusual for trade restrictions to be put in place unless significant numbers of contracts remain outstanding near expiration.

Street Talk

No comments present
You May Also Like
Why Using Sacramento Bookkeeping Services is A Good Option for Your Business?
These days, one of the very important parts of a business is to hire bookkeeping utilities to record all your financial transactions which include bargains, earnings, buys and installments by different individuals and groups. Most of the time, Sacramento bookkeeping services collects a group of accountants to make reposts on…
By: David Yaffee in  Finance  >  Taxes   Jan 03, 2013  
  Likes: 0

Love Has No Expiration Date, If You Have it Don't Leave it for the Wrong Reason
It is never late to love someone and fall in love. Even old folks are true to falling in love again, but truth of the matter is if you are in love and they are in love with you, don’t try to fix something that is not broken. Do your…
By: saytue sayewhat in  Relationships  >  Love   Mar 22, 2012  
  Likes: 2

Elss : Encompassing Investments With Tax Saving
The financial year 2015-16 has ended and with that, the tax paying deadline is also over. It is often observed that the clients pursue the tax saving plans by the end of the year, i.e., in February or March. It may have helped you till now, but it is a…
By: Dishika Baheti in  Investing  >  Day Trading   May 18, 2016  
  Likes: 0

How to Choose A Broker for Day Trading
Day trading is the practice of holding positions in a financial market for no longer than a single day, and often for much shorter periods of time. Day traders always exit any trade before the end of the trading day (often referred to as the 'regular cash session'), and aim…
By: Alexander Pearson in  Investing  >  Day Trading   Apr 27, 2016  
  Likes: 0

Fundamentals Of A Company Check - What Would Be the Services Employed
Business planet is cool as well as risky. The deeper you enter, the a lot more threat you get into. Nevertheless a systematic approach generally assists to collect the puzzle and stroll straight. Investing into a company could be helpful should you go through a meticulous company check. All strings…
By: daniel huang in  Investing  >  Day Trading   Apr 26, 2016  
  Likes: 0

How Administration Outsourcing Benefits Private Wquity And Venture Capital
In the high-frequency world of alternative securities, private equity and venture capital investments stand out for bringing in substantial returns from equity appreciation and capital gains. Private equity firms align with accredited investors, like wealthy individuals and institutions such as foundations, university endowments, pensions, insurance companies, and other multi-manager funds,…
By: Cheryl Muncher in  Investing  >  Day Trading   Mar 15, 2016  
  Likes: 0

Tips for Buying Refurbished Robots
Is a refurbished robot right for my business? That is the first question that comes to mind when you consider buying a refurbished robot. They are repaired, rebuilt, and cleaned in order to reenter the robot market. If bought from a quality robot store, they offer cost benefits as well…
By: alexbarker in  Investing  >  Day Trading   Feb 19, 2016  
  Likes: 0

Out Of Currently Being Goods Involving Must to Help Professions to 800 DIY Currently Currently Being
Many people maintain the money pertaining to items it's possible not really pertaining to paying for models concerning the Professions powerleveling railings. The most famous porch models typically include wood. Lumber porches plus lumber railings generally go with equally modern day plus Victorian or even various other form real estate.…
By: appgamenews in  Investing  >  Day Trading   Jan 21, 2016  
  Likes: 0

What is the Highest Standard Of Corn Peeling Machine?
Corn peeling machine develops towards high-performance. And we have high quality automatic corn peeling machine now. Corn peeling rate can reach 98% above and soybean and mung bean peeling rate can reach 95% above, which reaches the highest standard of this industry. When it refers to find out a high…
By: paomo in  Investing  >  Day Trading   Jan 08, 2015  
  Likes: 0

How To Choose The Right Bridesmaids Dress
Like planning your wedding, every stage of the selection of bridesmaid Long Champagne Bridesmaid Dress is once in a lifetime event. Exciting, right? But because it is a one-time, I know to make a decision may be a little scary. After all, you can not rely on past experience to…
By: vickysunny in  Investing  >  Day Trading   Oct 27, 2015  
  Likes: 0

Knowing The Ins And Out Of Forex Helps
Opportunities abound for personal traders in the Forex marketplace. You should take time to research the forex market carefully, as it can net you significant earnings. During the learning process, new traders can greatly benefit from guidance provided by seasoned traders. Read this article for advice on how to get…
By: mick leach in  Investing  >  Day Trading   Feb 07, 2012  
  Likes: 0

So What is Forex?
If you have ever traveled to a foreign country, then you must have found it rather necessary to find a currency exchange booth right at the airport, and exchange the money present in your wallet that is if you are a man or a purse if you are a women,…
By: Graham O. Osano in  Investing  >  Day Trading   May 12, 2013  
  Likes: 1

Automatic Forex Trading Systems - Do Metatrader 4 Expert Advisors Really Work?
If you've been on the Forex trading scene for any given amount of time, you're likely to have come across one of the many automatic Forex trading systems available on the market. The majority of the best Forex trading systems are created as Metatrader 4 expert advisors, and there are…
By: Thad B. in  Investing  >  Day Trading   Feb 21, 2011  
  Likes: 0

Things to Avoid Before Entering the Forex Market
A vast majority of forex traders never achieve success as a forex trader, yet everyone wants to get into the forex business. They think that they be able to beat the odds and become one of the few successful forex trader. However, most traders enter forex market and make the…
By: prabhu1 in  Investing  >  Day Trading   Dec 30, 2013  
  Likes: 0

Truths That Cannot Be Denied About Forex
There is a lot of interest in forex markets, but a lot of people tend to be hesitant. Perhaps it seems difficult for a lot of people. It's always wise to be careful with your money. You want to educate yourself on Forex before you start investing. Pay attention to…
By: mick leach in  Investing  >  Day Trading   Feb 08, 2012  
  Likes: 0

Article Views: 2399    Report this Article