Option trading is a comparatively a new concept for investors. Prior to option investment options, most of the investors were limited to a little number of option investment strategies. For instance, buy stocks when these were expected to gain and sell stocks when it’s predicted to decrease. But nowadays, option investment strategies involve many other aspects as well.
After the exchange traded options introduced, traders can access to various investment strategies. Today majority of investors can utilize the opportunities that allow them to profit in many ways: up, down, or sideways stock places.
The result, as expected, is that the option trading has grown rapidly. Today every investor can use a wide range of investment strategies. That range from conservative investment strategies to the high risk investment strategies.
This enables the average Joe to design and use an investment strategy of his choice that can either offer expected returns while maintaining the same risk levels or it may minimize risk levels while keeping the higher returns.
Some of the most common option investment strategies that are being implemented, the definitions of some of the key option terms, forecast terms, and option language terms are:
Key Option Terms:
1) Strike Price: This is the price that options must reach to be exercised.
2) Expiration month: The month when the option expires.
3) Call: It’s an option to purchase the stock in future.
4) Put: It’s an option to sell the stock in future.
5) Premium: The value of the option that you pay.
6) Exercise: Exercising your right to buy or sell the option.
7) American Option: This is the option that you can be use at any time up to its expiration.
European Option: These options can be used only at the expiration.
Option Language Examples:
1) Buy the XYZ June 50 Call at $4.00
2) Sell the XYZ June 50 Call at $2.00
3) Buy the ZYX August 20 Put at $5.
4) Sell the ZYX August 20 Put at $0.50
Here, a trader issues his order to buy/sell, (XYZ/ZYX), choose the expiration month, strike price, nature of option (Call/Put), and then he choose the option premium to bid to buy and sell stocks.
The terms of stock market forecasts are:
1) Bullish: If you believe the price of the stocks will increase.
a. “Outright Bull”: If you think the stock price has the potential to go up substantially.
b. “Moderate Bull”: If you think there is a limited chance for price appreciation of stocks.
2) Bearish: If you believe that the price of stocks will decrease.
a. “Outright Bear”: If you think the stock price has the potential to go down substantially.
b. “Moderate Bear”: If you think there is a limited chance for price decline.
3) Neutral: If you think the stock price will remain almost same.
Once you understand all of these useful terms of stock market, you can use these option investment strategies to explore the stock option market.
Related posts:
