April 1, 2011 8:10 pm

Stock Option Trading

 
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There are three basic ways in which stock options are used. Stock options can be exercised to buy or sell the stock, used as a way to reduce risk against declining stock in the investor’s portfolio, or traded. Stock option trading is a way to profit from the fluctuations of the stock market without actually investing in stocks.

Trading stock options is done with buying and selling call options or put options. Buyers of stock options must pay a premium or price for the options. The premium is for the right to buy or sell one hundred shares of the stock that the option is written against.

For someone interested in stock options trading, it is essential to have a basic understanding of how options are priced. Several factors influence the fluctuating value of options. A stock option’s intrinsic value is equal to the difference between the strike price and the price of the stock.

Stock option prices go down as the expiration date draws near. An option for a highly volatile stock is worth more than a stock that is relatively stable in value. Interest rates also affect the value of stock options.

Investors who trade stock options often use option trading strategies. Certain strategies are used for specific market conditions. An options strategy for a bearish market will be different than one used for a bullish or neutral market.

Stock options trading is done through futures exchanges or options exchanges. The Boston Options Exchange and the Chicago Board Options Exchange are national options exchanges in America. Due to Securities and Exchange Commission regulations, American traders can only trade American stock options.

Options based on most publically traded stocks are available for options trading. Each stock option is a contract giving the buyer the right to buy or sell one hundred shares of the stock upon which the option is based.

A call option gives the buyer the right to buy the underlying stock at the strike price indicated. A put option gives the buyer the right to sell one hundred shares at the strike price.

Stock options can be traded on the Internet through investment brokerage firms like TD Ameritrade. Many brokers like TD Ameritrade offer educational resources on their websites for investors to learn more about options trading.

Some websites of brokers have tools for investors to use like options calculators. Advisors are sometimes available to answer questions. Investors should investigate the fees associated with options trades. Some brokers have a flat fee for trades while others charge a fee per options contract.

If the investor is likely to usually trade more than one contract at a time, that investor might benefit from a broker that charges a flat fee. Investors who only invest in one contract at a time might want to look for the lowest fee per contract.

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Disclaimer: The risk of loss in trading any financial vehicles such as securities, options, futures and forex can be substantial. Members must consider all relevant risk factors, including their own individual financial situation, before going into trading. Options involve risk (as in trading with any other channels) and are not suitable for all investors. See Characteristics and Risks of Standardized Options. Past results of any individual trader or trading system published by us are not indicative of future returns by that trader or system, and are not indicative of guaranteed future returns which may be realized by members.

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