Understanding Options Trading Terminology

By Author: Jamie Hanson
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Options trading can be like a intimidating thing to get in but if you do your research and know at least the principles of what must be done, then you will find that it is not quite as intimidating as everyone considers it is. There are four basic things that you will need to know in order to even think about beginning option trading. Long call basics, writing a call, long put basics and selling a put are necessary to know and will help you out too much in the long run.

Long Call Basics
Here are the long call basics. When you buy or go long win a call option, that signfies that you have the authority, but not the compulsion to buy one hundred shares of stock from the call option seller at the offered price. That price is called the strike price. You owning this authority will just happen for a particular span of time and you will need to pay a premium for it. However, you need to pay a greater premium if the time limit is longer and the instability of stock market.

Writing a Call
The words, writing a call, is when you sell someone the authority, but not the compulsion to buy one hundred shares of ...
... a given security from you at a specific price in a specified time frame. You can also write a naked call which means that you have not hedged it to limit your losses in any way . This can be a potentially great risk plan because you can probably be on the hook for an infinite amount of loss which is never a good position to be in. One of the better methods to cover yourself in this condition is to only write calls against a hundred shares of stock that you already posses that means that if the person you sold the call to decided to exercise his authority, then you already own the shares and don't have to go out in the marketplace to buy them. While you are thinking about options trading, you need to keep the risk as minimum as possible.

Long Put Basics/Selling a Put
The reverse of buying a call option is to buy a put option. A put option is one that gives you the right but not the obligation to sell one hundred shares of a given security to a person at a specific price within a particular period of time. This option gives you the possibility for endless benefits not like the call option. When the contract will slowly expire, you will have to pay premiums for the right to sell shares whose value will slowly decline.

When you sell a put, you give someone the authority but not the compulsion to sell you one hundred shares of the given stock. There is no infinite risk as with the naked call option so the maximum that you can lose is between zero and the strike point, minus the premium you receive. When you are option trading you will want to simply sell a put when you guess the stock price will increase in value.

Knowing these basics of how option trading works will be sure to help you get started in option trading. Conducting the right search and talking to people who work and live the trade will be priceless in your options trading career and will help hoard you a lot of money. Many people say that it is a very scary and risky thing to get into but it really isn't if you know what you are doing and are careful not to take too many risks until you fully understand the process and are comfortable with it.

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