The first question you ought to ask is what is an option? An option basically is a contract. This is an agreement on some underlying trading instrument. These can be shares of stock, bonds, commodities, etc. There are common features on options no matter what they are. One of the most basic features of a contract is when it specifies what the option owner has contracted for. What is A Call? A ‘call’ gives the holder of the contract the right to buy at a stated price. This is agreed upon on or before a specific expiration date. It’s important to remember the following. This is not a right to buy, nor is it an obligation. The call owner has the choice if he or she desires to let the option expire the only loss at that point is the money they have paid for buying the contract. So what is the name of the game when it comes to a call? The call buyer is simply betting on the future performance of a stock, bond, commodity, etc. When you call the expectation is that the underlying asset will increase in price before their contract expires. The hope is that it will not only rise but increase enough to make a decent profit. The question then becomes how much is enough? The price of the contract must at least increase enough so that it will cover the difference between the market price and the so called strike price. The strike price is the price at which the stock must be bought. You must also not forget that the option itself has a cost, so the price has to increase enough to cover that additional amount. They term this cost as ‘the premium’. Ho do you determine the premium of an option? You do this through several factors. These factors include the price of the underlying asset, then it is determined by the strike price. Then finally it is the time remaining on the option. There are also other factors that need to be considered. The time remaining is very important. Let’s think of it this way, if you have 120 days to exercise an option, your risk would be far less than if you have only one day. The more time the greater the chance that the price will rise. The less time you have the less likelihood that it will rise. By understanding these basics and doing your homework success will be in your future. Discover the information you need which you can use to consistently generate BIG profits from the market. Learn about Options Calls and Puts. Learn about Funds and Options. Find out about Futures Risks and Advantages Tags: optins trading, options basics Related PostsPost a comment
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