1 of 4

Write now Article Tools

Options are a contract agreement between the option contract supplier and than buyer of the options. Options are purchased in time periods of about a month and can be commonly purchased as far in advance as four months. The purpose of buying options is to make a profit by exercising the contract at a favorable price. Favorable prices are determined by assessing the contract price, underlying securities price, and expected exercise price of the contract Since options contracts are derived from underlying securities such as stocks, they are termed 'derivative securities'.

How to Buy Options:

To buy options one must have good credit and enough money to support adverse results in the course of trading. The contracts are offered through brokerage firms and/or investment banks and each option represents 100 units or shares if the options are for stocks. The contracts are usually sold with expirations of 30 days beginning every month. There are two types of options contracts called 'calls' and 'puts'; calls are options that allow the contract holder to buy underlying stocks at the fixed 'strike' price whereas puts allow the trader to sell at a 'strike' price. While stock options are well known and actively trader, there are also several other types of options in several different securities markets that include the following:

-Stock Options
-Futures Options
-Foreign Currency Options
-Interest Rate Options
-Index Options

In the Money Vs Out of the Money Options Vs At the Money

Choosing options that are in the money or out of the money depend on what one believes a security will do in the time period of an option and the risk adversity of the options buyer. In the money options are considered less risky than out of the money contracts.

When options contracts are bought 'in the money', the securities purchased through the options contract are priced lower than the time of purchase if the option is a call. This worth is reflected in a higher cost of the options contract. An out of the money contract is the opposite, the underlying securities are priced higher than the actual market price of that security and this makes the call options contract cheaper. The inverse is true for put options and securities purchased through options at the money contracts are equal to or near equal to the price of the underlying security.

When to Exercise Options:

Stock options traded on U.S. stock exchanges can be exercised at any time during the term of the contract whereas European options can only

• 1
• 2
• next page >>

Add your voice

Know something about How are options traded??
We want to hear your view. Write now!