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Barbaras Practical Tips To Abide By When You Are Choosing Options Trading Course

March 9th, 2010

Differences Between Stocks And Options

One significant difference between stocks plus options is which stocks give you a little piece of ownership in the corporation, whereas options are simply contracts which offer you the right to buy or sell the stock at a specific price by a specific date. It is important to remember that there are always 2 sides for each option transaction: a buyer plus a seller. Therefore, for every call or put option purchased, there is always someone else selling it.
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When individuals sell options, they effectively produce a security that did not exist before. This can be referred to as writing an option and explains 1 of the major sources of options, because neither the associated company nor the options exchange issues options. Once you write a call, you may be obligated to sell shares at the strike price any time before the expiration date. After you write a put, you might be obligated to buy shares at the strike price any time prior to expiration.

Trading stocks may be compared to gambling in a casino, where you’re betting against the house, so if all the customers have an unbelievable string of luck, they could all win. But options trading is more like betting on horses at the racetrack. There they use parimutuel betting, whereby every person bets against all the other individuals there. The track simply takes a little cut for providing the facilities. So, trading options, like the horse track, is a zero-sum game. The option buyer’s gain is the option seller’s loss and vice versa: any payoff diagram for an option purchase needs to be the mirror image of the vendor’s payoff diagram.

Several More Basics Of Options

The price of an option is known as its premium. The buyer of an option cannot lose more than just the initial premium paid for the contract, irrespective of what happens to the underlying security. Thus, the risk to the client is rarely more than the number paid for the option. The profit potential, on the alternative hand, is theoretically unlimited.

In return for the premium received from the buyer, the seller of an option assumes the danger of having to deliver (if a call option) or taking delivery (if a put option) of the shares of the stock. Unless that option is covered by another option or a position in the underlying stock, the seller’s loss may be open-ended, meaning the seller may lose much more than just the first premium received.

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