Basic Option Stock Trading Terms

You might want to learn about basic option stock trading. This is yet again, another great way to secure your financial future. Like everything else about trading assets though, stock trading may not always be easy to comprehend. The best way to get the ball rolling for you is to find out the definition of basic terms used in stock trading. Here are some of them.

Stock Options

These are similar to contracts. When you own a stock option, you have the right but not the obligation to buy or sell a particular underlying asset for a particular set price within a specific period of time. What you own therefore is the right over some assets but not the assets themselves. Stock options therefore cost considerably less than the assets themselves. When the appointed contract time for buying and selling nears its end, you may or may not choose to push through with buying or selling the assets that you control. The basic advantage here is that, you can buy an asset for a fixed price regardless of whether its real value increases or decreases. Depending on the type of option you buy, you can be at a great advantage.

Underlying Asset

This usually refers to a stock or the shares for which you bought an option for. The underlying asset is what you will buy or sell when the option contract expires.

Holder

The person who owns an option is called a holder.

Strike Price

The strike price is the price of the underlying asset. This is the price which must be paid when stocks are bought or sold within the set time period of the stock option.

Premium

A premium is what you would have to pay for an option. This is a simple way of looking at basic stock option trading though. The premium is more complicated than it seems. In order to arrive at a premium, one has to consider a couple of factors when computing. These factors include the strike price, volatility, expiration date of the option and the price of the assets.

Call Option

This is an option to buy an underlying asset for an agreed price before the option expires. This gives you the potential to get a good profit. If upon purchasing, the value of the assets increase, you still get to buy it for the lower price you agreed upon. You would naturally have to hope that you were right to speculate about the potential of an asset’s value to increase.

Put Option

A put option is the opposite of a call option. When you own a put option, you are given the right to sell the underlying stocks for a set price within a specific period of time. In this case, you are speculating that the value of the assets will fall before the option expires. You therefore profit when the value of the assets drop.

Expiration

The expiration date is when an option ceases to be valid. This is when a holder should decide whether he wishes to buy or sell, depending on the kind of option he owns. It is a holder’s choice if he chooses not to do anything on this day, in which case he cannot retrieve the price he has paid for the option.

In the Money

This is when you are in the position to profit from your option. If you have a call option, it is in the money, if the value of the underlying asset has risen above the strike price. If you have a put option, the value of the underlying asset has dropped below the strike price.

These are only the basic option stock trading terms. There are many others that you would have to understand. Starting with these however can get you on the right track.