Stock Trading Options

An option is the right, but not the obligation to buy or sell an asset at a given price sometime in the future. The price of an option is derived from the difference between the reference price and the value of the underlying asset plus a premium based on the time remaining until the option expires. Options can be written on stocks, foreign exchange, commodities, futures and even on underlying assets such as purchasing a property, construction of a mine or leasing an airplane to a business.

In essence, there are two types of options - calls and puts. A buyer of a call option believes that the underlying asset will increase in value and gains the right, but not the obligation to engage in that transaction. The seller incurs the corresponding obligation to fulfil the transaction. The reference price at which the underlying may be traded is called the strike price or exercise price. Most options have an expiration date. If the option is not exercised by the expiration date, it becomes void and worthless.

In return for taking up the obligation, the originator of the option collects a payment, the premium, from the buyer. The writer of an option must make good on delivering (or receiving) the underlying asset or its cash equivalent, if the option is exercised.

For example, let’s assume that an investor sells call options on BHP at $40.00 per share, which expire on 29 December. For taking on the obligation, the buyer of the option pays the investor a “premium” for taking on the risk of being exercised. If on expiry date, BHP is trading at $41.40, the buyer of the option will exercise its right, and the seller must to deliver that stock at $40.00. For taking on that additional risk, the buyer of the option receives an income, in the form of the premium.

Writing Options To Generate Income

Knowing that we have invested in an asset that cannot go to zero we can then let time do all the work for us. When writing options we want to; maximize the cash received, pick the right option, take advantage of volatility, pick the right expiration date etc. This is where OptionsDayTrading.com makes all the hard work for you. We monitor the stock and option market for USO every day, and our proprietary systems calculate what options to sell, and when it is the best time to do so.

Click here to find out more about options trading stratergies today.

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