How to correctly issue an option
You could do two things.
It expires in one month. Usually it will be a specific date, but I'm just saying one month from the date that you buy the option.
The strike price may be set by reference to the spot price market price of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount or at a premium. The seller has the corresponding obligation to fulfill the transaction i. An option that conveys to the owner the right to buy at a specific price is referred to as a call ; an option that conveys the right of the owner to sell at a specific price is referred to as a put. The seller may grant an option to a buyer as part of another transaction, such as a share issue or as part of an employee incentive scheme, otherwise a buyer would pay a premium to the seller for the option.
The type of fresh binary options strategy that I've just described is called an American option. And it can be compared to a European option.
An American option allows you to exercise the option-- to actually buy the stock-- any time from the time you have the option until the expiration. On a European option, you only have the option-- you could only exercise it-- on the expiration.
Stock options were just a footnote. Now the reverse is true.
But we'll just focus on the American. Now let's think about the different outcomes depending on what the stock does. So let's say the stock actually does do what you think it does. Let's say it goes up, and then it goes down.
The Pay-to-Performance Link
Let's say that you're really good at calling stock price tops. And then right over here-- let's take the two scenarios.
Let's take the scenario where you bought the stock, and then you sell the stock. So let's just think about the different profit scenarios. Now let's think about if instead of buying the stock, you bought the option today.
You may then see a blue Automatic Repair or Recovery screen.
So if you bought the option, same thing. When the stock goes up to here, you'll say, oh, I think that's the top for the stock.
Let me exercise my option. So there it says, hey, look. Maybe I was better off buying the stock.
The Downside Risk
And to see that, imagine the negative scenario, where instead of the stock doing that, let's say the stock just completely plummets after you buy it. Now in the situation with the stock-- let's say right how to correctly issue an option there you just had enough.
How to SELL a CALL Option - [Option Trading Basics]
You just say, I want to sell the stock. But in the option scenario, this entire time that it was plummeting, you'll say, I just won't exercise the option.
The option is out of the money. It makes no sense for me to exercise it. So you just won't exercise the option. So you'll only lose the price that you paid for the option.