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Options in stock trading. Getting started with options trading: Part 1

Updated Sep 18, What is a Stock Option?

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A stock option gives an investor the right, but not the obligation, to buy or sell a stock at an agreed upon price and date. There are two types of options: puts, which is a bet that a stock will fall, or callswhich is a bet that a stock will rise.

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Key Takeaways Options give a trader the right to buy or sell a stock at an agreed-upon price and date. There are two types of options: Calls and Puts.

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  • Trading options is very different from trading stocks because options have distinct characteristics from stocks.

One contract represents shares options in stock trading the underlying stock. American options can be exercised at any time between the purchase binary options 100 methodology expiration date.

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European options, which are less common, can only be exercised on the expiration date. Expiration Date Options do not only allow a trader to bet on a stock rising or falling but also enable the trader to choose a specific date when they expect the stock to rise or fall by. This is known as the expiration date.

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Strike Price The strike price determines whether an option should be exercised. It is the price that a trader expects the stock to be above or below by the expiration date. If a trader is betting that International Business Machine Corp.

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IBM will rise in the future, they might buy a call for a specific month and a particular strike price. Contracts Contracts represent the number of options a trader may be looking to buy.

One contract is equal to shares of the underlying stock.

If you want to start trading options, the first step is to clear up some of that mystery. What are options, and why should I consider them? An option you purchase is a contract that gives you certain rights. Depending on the option, you get the right to buy or the right to sell a stock, exchange-traded fund ETFor other type of investment for a specific price during a specific period of time.

Using the previous example, a trader decides to buy five call contracts. Premium The premium is determined by taking the price of the call and multiplying it by the number of contracts bought, then multiplying it by However, if a trader wanted to bet the stock would fall they would buy the puts.

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Trading Options Options can also be sold depending on the strategy a trader is using. Continuing with the example above, if a trader thinks IBM shares are poised to rise, they can buy the call, or they can also choose to sell or write the put.

The distinction between American and European options has nothing to do with geography, only with early exercise. Many options on stock indexes are of the European type.

In this case, the seller of the put would not pay a premium, but would receive the premium. Compare Accounts.