Basics Of Options
The premium of an option
It is the price that the buyer of an
option (put or call) pays the seller, for the right (to buy or sell
the underlying predefined conditions, respectively) derivative of the
option contract. In exchange for the premium, the seller of a put
option is obligated to buy the asset if the buyer exercises the
option. Symmetrically, the buyer of a put would be entitled (if they
exercise the option) to sell the underlying at the conditions. In the
case of a call, the buyer has the right to buy the underlying against
payment of a premium, and vice versa for the seller to call. The
option seller collects the premium always, regardless of whether it
exercises the option.
The premium of an option is negotiated
according to the law of supply and demand sets the market. However,
there are theoretical models that try to determine the option price
based on a number of parameters:
Price of underlying asset
Exercise price
Rate of interest
Dividends payable (only options).
Time to maturity
future volatility
Nominal amount: the amount of
the underlying asset.
Strike Price:- Strike: is the interest
rate that is fixed for settlement benefits if one exists between the
reference rate and the fixed option.
What is an option?
An option contract on an asset is a
right to buy or sell the asset at a predetermined price in the
contract, and at a certain date. The buyer of the option has the
right but not the obligation, provided that this exercise will be
beneficial. However, it does the seller assumes the obligation to
respond to the right buyer. Therefore, in an options contract will
always be a part that has a right, and another part that is a must.
Advantages of Options Trading
The number of open markets in the
financial world is very high. There are too many markets available to
trade it is very difficult for the average person to know which one
to use. Like all other things attached to the financial world, find
the best market is not easy.
The first and most important thing to
consider is to decide what type of person you are. Not every market
is suitable for all people. Take the forex market as an example. This
is known as a high-risk market due to being so volatile, although
there are many rewards. You must decide whether the forex market is
suitable for you before trading at.
There are a number of features that
make unique options trading. This list gives five characteristics
that make options trading because it is so unique and attractive to
many traders:
- Instant Satisfaction - There are people who are more patient than others, but no matter who you are, everyone wants to make money fast. Most financial markets talk in terms of days or weeks, options work in times of hours or minutes. You can put a option and within an hour to get your winnings. It is a quick and easy way to make money.
- Simplicity - If you are in any way familiar with the financial markets of the world, know everything about the complex charts, indicators, analysis, and all the other tools that help you trade. No matter what type of analysis you make, there is little need for preparation for trading on the markets. But not to say that there is need for research to trade options. It requires a lot of research but in the end all you're doing is just predicting whether an asset will rise or fall. There is no requirement to give an amount and there are no numbers involved, nothing could be simpler. If you think that the asset will rise put a call option, and if it goes up by even a penny you've made a profit. If you think the asset put a put down and if you get low profits.
- Flexibility - You are not limited to a market when you trade options. It is possible for you to trade in forex, commodities and indices. With options trading are all available for you. So if you are looking for a flexible option that allows you to trade in a number of different markets, options is for you.
- Transparency - Almost every trader has unexpectedly suffered market losses due to the sudden drop in the economy. However, options you will not be surprised. When you buy an option you know exactly how much you win or lose. This allows you to trade in a relaxed manner, which is very beneficial in any form of financial trading.
- Scalability - The options trading gives you the opportunity to learn about different markets with very little financial risk. While you are learning all about options trading, you can enjoy all the benefits mentioned above.
