How to trade options

Forms of trading:

Options can be traded in more than one way. The ways of trading options include exchange-traded options, stock market index options, bear contract, over the counter options and futures contracts.

Exchange Traded-options:

An exchanged traded derivative is another name given to the exchanged traded options. Exchanged traded options consist of standardized contracts which are settled with the help of clearinghouse and require the fulfillment guaranteed by Options Clearing Corporations. Accurate price models are offered on these contracts because they are standardized.

Stock options:

Those set of options which can be sold by one party to another and offer the right to the buyer but do not obligate the person with a right to buy or sell the stock within the specified period of time. American options are the one which can be executed between the date of purchase and the expiration date of the option.

Over the counter options:

Those set of options that are not listed on an exchange but can be traded between two trade private parties. Since its terms of (OTC) options are unrestricted therefore it can be individually modified to connect with any need of business. Thus option writer is well-financed institution. Some of the most commonly used option types include interest rate options, currency cross rate options, and options on swaps.

Call Options:

These are those set of options which facilitate the buyer with the right to buy an underlying security at the strike price. Moreover, the option writer is needed to give the underlying security to the option buyer only when the stock’s market price surpasses the strike price.

It is always believed by an option writer that the prices of the underlying stock will drop or remain constant in relation to the option’s strike price until the date of the option’s expiration. Thus this is how one can yield the maximum profit. As per the research analysis of many well-known financial analysts, the optimum value of profit that an option writer can earn is determined by the premium he/she received in selling the option. If the buyer’s stock rises above the strike price then the buyer might be able to acquire the stock for a low price and earn few profits by selling it at the current market price. Moreover, the option buyer may lose the premium in the case when the value of the underlying stock falls below the strike on the date of expiration.

Put Option:

This is the type of option which allows the option buyer the right to sell at the strike price. For example, a put option believes that the market price of the underlying stock will fall below the specified strike price on the specified date. The option writer’s maximum profit is achieved when his underlying stock’s price remains at the same price or closes above the specified rate. Unlike other options, a put option holder gains benefits from the decrease in underlying stock’s price below the strike price. The put option writer is obligated to earn a profit when the underlying stock’s price falls below the strike price. Financial analyst calculates the put option writer’s profit by subtracting current market price along with paid premium from the strike price. And then multiply the entire value by 100.

Fundamental Analysis

It is a type of analysis whose main focus is on the data originated from the sources like financial records, economic reports, company assets and market shares. For conducting important analysis of a company, investors do need to analyse the financial statements of a company like balance sheet, income sheet and cash flow statement. These types of statements are produced to the public in form of 10-Q or 10-k. Moreover, investors are also granted with a right to analyse the revenues, expenses and profits of a company by analysing their annual earnings reports.

Working of fundamental analysis

In financial analysis, an analyst generally measures the company’s profitability, liquidity, solvency, growth trajectory and leverage. Financial analysis consist of different ratios which determine the health of a company. The company’s ability in paying short-term liabilities is determined by comparing the current ratio with quick ratio. Current ratio is always calculated by dividing current assets by current liabilities. If the analysis of a stock analyst yields that the current ratio of a company is less than one, then it indicates that a company’s financial health is very poor. It also showcases that the short-term obligations may not be covered and can become due.

The comparison of financial statement with its current financial statement is one main work executed by stock analyst. The main purpose for performing this action is that it informs an investor about the company’s growth and stability and thereby keeps him at a safer side in the business. This analysis also deals with the comparison of operating profit margin of two competing companies and rigorous analysis of their income statements. Operating profit margin is known as the amount of revenue which gets left after operating expenses get paid and is considered as the proportion of revenue that gets left to cover non-operating costs. For calculating operating, analyst divides operating income by revenue.

Technical Analysis

Technical analysis is the second method of stock-analysis and it mainly focuses on the study of past market action to forecast future price movement. The significant role of technical analyst is to analyse the price and volume, demand and supply and other aspects of financial markets. For understanding the graphical illustration of stocks’ trend, technical analysts use charts as a key tool for analysing the financial market.

For an assumption, a technical analyst may mark some specific areas like support and resistance level by using the help of a chart. In business charts, support levels are always market below the current trading price and it also showcases the resistance markers which are placed at previous highs above the market price of the stock. A stock analyst can easily determine the bullish outlook if the break is above the resistance level in business chart. And he can also understand the bearish trend, if the break falls below thee support level in a business chart.

When price trend analysis gets analysed by the supply and demand forces, only then technical stock analysis is known to be effective. The technical stock analysis may not turn out to be successful when it gets impact from the external factors get involved in determining the price movement and in analysing stocks. External factors that can easily affect the technical analysis include stock splits, mergers, dividend announcements, death of a CEO, accounting scandals, change of management, monetary policy changes etc.

Stock analyst do not face any problems in accessing the fundamental and technical analysis because they can be analysed independently. Some of the analyst refer both of these methods to find accurate results. From stock analysis to vet stock sectors, these types of methods are used by every analyst. Thus it can be concluded that financial market is known as the most significant method in creating the best investment strategy for portfolio.

Change in investment during different ages

As of now, investment has become the most important decision for everyone in life. Whether someone is in his 20’s or 50’s, the necessity of having investment plans is as important like having a house for getting protective shelter. Every individual has his own aspirations and for fulfilling them he thinks of getting an appropriate investment so that in future he/she does not need to rely on anyone. It is believed by many financial analyst that those set of people who are young and dynamic are ready to take higher risk and can also contribute by investing in mutual funds. Whereas those set of people who are older take the advantage of their salaries to live rest of their lives peacefully.

Begin Investment Planning in 20s

For those set of people who are in their early 20’s or have graduated from college need to think of investing atleast few amount of money in mutual funds by SIP. This is due to the fact that greater the amount of returns they will get in future, the brighter will be their future. The biggest advantage to the youth will be that they can take the benefits of compound interest by just investing in those mutual funds which promise them of high growth. Moreover, these set of people who are involved in share markets and are known for investing in aggressive stocks should think of investing in the mutual fund markets.

Career-Focused in 30s

The age group of 30s is especially for those type of people who focus mainly on their careers and think of how they can spend another (30-40 years) of life. This age might be the time for many people to achieve the heights of success. But if they think of investing in any mutual funds then it might prove to be the best way because by following this way they might climb the ladder of success.

Retirement-Minded in 40’s

After the age of 40, many people think of their retirement plans and start procrastinating about the future plans. It is a perfect time for the people in their 40’s to get serious about their future. Even if the person is at the mid-point of his career and wants to reach the peak point in his career then also he can invest any kind of mutual funds that suits his buying capacity.

After retirement 50’s and 60’s

For those set of people who are getting retired or have reached in their early 50’s then there is a chance left for them to rethink of investment and perhaps losing the hope is also not a problem. At this age people need to be more conservative about their investments and savings

By switching the investments to more stable markets and in low-earning bonds like funds it can turn out to be a good choice for the shareholders in case they don’t wish to risk all of their savings. Thus it is advisable to every shareholder to get good advice so that his money can get secured.

Shorting Stocks

In the terms of finance, shorting stocks means that the sale of asset which includes securities and other financial instruments which is not owned by the seller. It consist of seller effects like the sale of borrowing the asset so that it can be transferred to the buyer. Therefore, share position remains covered at the time of its purchase by seller so that he could deliver the purchased asset to the required lender. Even the short seller can gain profit by the decline in the prices of the goods because the cost of repurchase will be estimated to be less than the proceeds received upon the initial (short) sale. It can also result in loss when the price of a shorted inflates before the repurchase.

As per the financial analyst there is no theoretical limit put on the rise in the price of an instrument. It is also observed that short sellers also support margin or collateral to cover up the losses. Moreover their inability in doing this in a timely manner also causes broker or counterparty to liquidate the position. From the outlook of financial analysts, sellers generally borrow the securities in the span of short time so that it can give push to their sales. It is observed that in some cases, the short seller must also pay fees to purchase securities and can repay the lender for some cash returns so that the lenders could receive those set of securities which are not loaned out.

This type of process is usually done with financial instruments which can be traded in public securities, futures or currency markets. The main reason is due to the liquidity and real-time price distribution feature of such financial markets and the instruments which are defined within the each class.

In other terms “going short” is also considered as the opposite of the conservative practice of “going long”. Therefore investors earn profit from the increase in the price of asset.

From the reports of newspapers it can always be noticed that the public company whose shares are traded on stock-exchange usually consist of tens, hundreds of millions of outstanding shares which are owned by several stakeholders. It also consist of individual investors, employees, institutional investors, employees, managers and executives. Thus the common thing which all of these shareholders have is an interest in attaining the substantial success of the company. Most importantly, financial analyst also believe that the share-price of company should appreciate with time and should create wealth for all the shareholders.

A public company whose shares are traded on a stock exchange generally has tens or hundreds of millions of outstanding shares that are owned by its various stakeholders – individual investors, institutional investors, employees, managers and executives. All these stakeholders have a common interest – the sustained success of the company, which should result in its share price appreciating over time and creating wealth for all its shareholders. Thus it can be concluded that the shareholders who choose the form of short selling can also be benefitted.

Brokers are known as those set of business people who arrange dealings between a buyer and seller and take the charge for commission when the deals gets executed. The role of a broker can be of a seller or buyer whenever he becomes a principal party to the deal. Unlike the role of agent who acts on behalf of the principal party, the role of broker is quite different. Small trader is yet another name given to these brokers.

Generally, the services of a broker is not limited to only an independent party but can also be used widely in different industries. The foremost responsibility of a broker is to bring sellers and buyer together because he works as the facilitator between a buyer and seller. The best example to present the work of a broker will be in the real-estate market in which his main task is to sell a property.

Brokers also provide the market information relating to prices, products and market conditions. They can work either as seller or buyer but cannot enact both of these roles. An example to support this statement will be that of a stock-broker who is known for making the sale or purchase of securities on behalf of a client. From selling of stocks, bonds and other financial service, the role of a broker is quite huge and is not limited.

Even if someone wants to sell his financial securities then taking the help of a broker can be proved to be of a greater help. The first reason behind choosing a broker is that he knows the real value of a financial asset in the markets and are known for creating strong relations with perspective customers. Very often, people chose them because they are equipped with tools and resources to create a base of buyers. Then these brokers analyse the certain amount of buyers who can support the possible acquisition. Moreover an individual producer, especially when he is new to the market cannot create the market base or fetch customers more easily as a broker does. The other fact which signifies the importance of brokers is that they charge less commission in smaller markets.

It is advisable to the shareholders to look after the necessary documents relating to the brokers profile before they hire any because only then they might get sure about promoting their business to the different set of people. Some of the brokers are specialised in different fields like real estate brokers, aircraft brokers and they do not require no formal license or training requirement.

The services offered by full service brokers include market research, investment advice, retirement planning and provide the customers with wide range of investment products. Brokerage firms usually compensate the brokers on the basis of their trading volume and on the sale of investment products. Although many number of brokers offer fee-based investment products like managed investment accounts.

Those days have gone when only the wealthy could afford a broker and get the access to stock market. The all new era of internet generated a possibility of getting discount brokers who can access the stock market. Thus through the help of brokers investors can easily trade at a lower cost.

How to choose the best one?

A person who enacts the role of a facilitator between buyer and a seller is known as broker. The services offered by full broker includes market research, investment advice and retirement planning. Those set of investors who have high trading businesses can be expected to pay higher commissions for their trades. Many brokerage firms offer compensation to brokers on their services including the sale of investment accounts. Fee-based investment products like management investment accounts are also offered by brokers.

Brokers Regulatory Body

The Financial Industry Regulatory Authority (FINRA) is a self-regulatory body which determines the working of brokers. Brokers work according to the suitable rules which specify them to give reasonable recommendation of a product to the buyer. Moreover investors are advised to choose those set of brokers who can understand the customers and value them. The broker who is able to put reasonable effort in getting the information about customer’s financial status, tax status, investment objectives and other relevant information. The standard of conducted executed by brokers differs largely from the financial advisors.

Real-estate brokers

The main aim of real-estate brokers is to sell a property by determining its market value, listing and comprehend different ways of promoting the property to prospective buyers. Real-estate brokers are also liable for gaining the information related to sales consideration.

The role of broker in real-estate field is quite much larger as he need to specify the specific area of land that lies in the capacity of a buyer. In addition to it, a broker is also liable for making an initial offer, purchase agreement for buyer and tries his best to negotiate the deal at reasonable rates with the buyer.

What is a Discount Broker?

If a buyer wishes to purchase any financial asset at a discount rate then he should get in touch with the discount broker. The main service of discount broker is to “buy” and “sell” financial products at a reduced charges in comparison to the services of full service border. Moreover discount broker do not provide any investment advice.

How to get the right type of broker?

If someone is a novice investor then for him selecting a broker will be the chief investment decision. Moreover, the sellers should also see whether the broker has handled the transaction cases in past because an experienced broker will be of great help in making their assets sell to the buyers. The second reason to hire an experienced broker is that they know all the rules of real-estate property management. In the times of today, there is not only one type of broker. Brokers like mortgage brokers, option broker, stock broker, investment broker, joint venture broker, customs breaker, customs broker, sponsorship broker and many more. By taking the help of a broker, people have become more confident while dealing in the share markets. However, there are certain amount of risks associated with selling of shares but with the help of broker many shareholders have been able to get assurance.

Margins and leverages

In the terms of finance, margin is defined as the security that the holder needs to deposit with a counterparty which includes their brokers. In case, if shareholder borrows some cash from the counterparty for buying financial instruments or have borrowed financial instruments for selling them at short time period then there are the certainties of rising risks. Lastly, the chances of risk may also arise if the shareholder has entered into derivative contract.

Share traders generally maintain margin account with the help of broker so that it can help them in share trading. The marginal loans are determined by the broker on basis of securities owned by the trader. It is usually a right of broker to modify the percentage of the security value so that it further gives advances to the trader. The broker can also make a margin call if the available balance declines below the actual utilised amount. In case where the cash balance of margin account turns out to be negative then the amount gets owned by the broker. The account holder is able to reinvest into the shares if cash balance comes out to be positive or he can also with draw the certain amount of money and can earn interest.

The enhancement of buying power which is available to margin account holders is called leverage. The most powerful thing about leverage is that it allows a shareholder to pay less than full price for the trade. Moreover it gives them the ability to go in larger positions as compared to other funds. Leverage is always expressed in the terms of ratio such as (2:1).

Financial leverage is referred as a technique which is involved in borrowing the funds for purchasing an asset. Generally the finance provider sets a limit on how much risk can be taken by a shareholder. The finance providers also set a limit on how much leverage it can permit and they demand for the acquired asset to be provided as collateral security.

There are many reasons that support the rise of leverage in many cases. For an assumption, when a person leverages his savings for buying a home by financing a portion of the purchase price with mortgage debt. Secondly in case, when individuals leverage their exposure to financial investments by borrowing from their broker. Sometimes equity owners of large size businesses leverage their investment by borrowing the few proportion for financing their needs. Many business leverage their businesses by utilising fixed cost inputs at times when revenues are expected to be variable. It is said by many financial analyst that an increase in revenue result in a large increase in operating income. Those set of shareholders who hold hedge funds may leverage their assets by financing a specific share of the portfolio with the cash proceeds from the undersized sale of other positions.

Risks associated with leverage

Leverage is considered for enlarging profits when the returns yielded from the assets exceeds the cost of borrowing. But sometimes leverage can also magnify losses. When a corporation buys too much money then it might face bankruptcy or default at the time of his business going downwards. For an example, if an investor buys a stock on the margin of (50%), may lose (40%) if the stock falls by (20%).

Options

An option is generally considered as a contract which offers the right to a buyer. But it does give the obligation to buyer to buy or sell an underlying asset or instrument which is given at a specified strike price on a specified date. The price at which a derivative can be implemented is called as strike price and it is referred as the price of derivative’s underlying security. In the put option, the strike price is determined at which the option holder can sell the underlying security.

According to some financial experts, the strike price may be in reference to the market price of the underlying security or commodity on the day an option is conceived. An option is fixed at a discount or at a premium rate. It conveys the owner of shares about the proper time of selling the shares or holding them. An options which conveys the owner about the right time to buy a specific share is referred to as call. Whereas the put option is considered as those set of shares which can be sold at a specific price.

Share issue is known as the option which is granted by the seller to a buyer and it is also considered as the part of an employee incentive scheme. Another way can be when a buyer would pay a premium to the seller for an option. When the strike price of an underlying asset is below the market price then a call option is practised. The premium is added to strike price of the asset when it is acquired by a buyer. An option expires when its expiration date gets executed without the option being exercised. The premium is considered as the income to the seller and it is accounted as the capital loss to the buyer.

With the help of counter-transaction or an options exchange, the owner of an option may be eligible to sell it to a third party in any secondary market. The difference between the market price of a stock and strike price of an option can differ and it determines the market price of an American style option. Due to numerous factors like the necessity of an option holder to sell the option before it approaches the expiration date and lack of financial resources to exercise the option can lead to the variation in actual market price of an option. The holders of options are never entitled to any of the rights linked with the underlying asset like voting rights or the right to generate income from the underlying asset like dividend.

For the past many decades options contracts have been known to the world. In the year 1973, The Chicago Board Options Exchange was created. Its administration was built through the help of standardised forms and terms which were passed through a guaranteed clearing house. The financial institution of Chicago has enhanced the two most specific activity areas like in trading and academic interest.

This has further led to the amplification of options in the times of today and all of them are produced through clearing houses which trade them to the buyers in a standardised form. Whereas the counter-options are meant to be bilateral and customised contracts which lie between a buyer and seller. Options are the constituents of extensive set of financial instruments which are known as derivative products or simply called as derivatives.

There are many forms of trading options like exchanged-traded options, stock options, stock options, stock market index options, options on future markets and bear contracts.

Exchange trade options are classified as exchange-traded derivatives. These options consist of standardized contracts and these are settled through the fulfilment which will be guaranteed by the Options Clearing Corporation (OOC). These contracts are standardized and accurate pricing models of them are also available.

Forms of trading

Options can be traded in more than one way. The ways of trading options include exchange-traded options, stock market index options, bear contract, over the counter options and future contracts.

Exchange Traded-options

Exchanged traded derivatives is another name given to the exchanged traded options. Exchanged traded options consist of standardized contracts which are settled with the help of clearing house and require the fulfilment guaranteed by Options Clearing Corporations. Accurate price models are offered on these contracts because they are standardised.

Stock options

Those set of options which can be sold by one party to another and offer the right to the buyer but do not obligate the person with a right to buy or sell the stock within the specified period of time. American options are the one which can be executed between the date of purchase and the expiration date of the option.

Over the counter options

Those set of options that are not listed on an exchange but can be traded between two trade private parties. Since its terms of (OTC) options are unrestricted therefore it can be individually modified to connect with any need of business. Thus option writer is well-financed institution. Some of the most commonly used option types include interest rate options, currency cross rate options, and options on swaps.

Call Options

These are those set of options which facilitate the buyer with the right to buy an underlying security at the strike price. Moreover the option writer is needed to give the underlying security to the option buyer only when the stock’s market price surpasses the strike price.

It is always believed by an option writer that the prices of underlying stock will drop or remain constant in relation to the option’s strike price until the date of option’s expiration. Thus this is how one can yield the maximum profit. As per the research analysis of many well-known financial analysts, the optimum value of profit that an option writer can earn is determined by the premium he/she received in selling the option. If the buyer’s stock rises above the strike price then the buyer might be able to acquire the stock for a low price and earn few profits by selling it at the current market price. Moreover the option buyer may lose the premium in case when the value of underlying stock falls below the strike on the date of expiration.

Put Option

This is type of option which allows the option buyer the right to sell at strike price. For example, a put option believes that the market price of underlying stock will fall below the specified strike price on the specified date. The option writer’s maximum profit is achieved when his underlying stock’s price remain at the same price or closes above the specified rate. Unlike other options, a put option holder gain benefits from the decrease in underlying stock’s price below the strike price. The put option writer is obligated to earn profit when the underlying stock’s price falls below the strike price. Financial analyst calculate the put option writer’s profit by subtracting current market price along with paid premium from strike price. And then multiplying the entire value by 100.

Types of orders

Orders are generally considered as the instruction that a person needs while buying or selling a share like stock market, bond market and commodity market or even in crypto-currency exchange. These set of instruction are said to be simple or complicated because they can be sent to a broker or trader by market access. Thus some standard instructions are also set for such orders.

For buying or selling an asset in the financial market as per the terms and conditions specified in the instructions is known as the market order. These types of orders are used when certainty of execution is given the priority over the price of execution.

A market order is a buy or sell order to be executed immediately at current market prices. As long as there are willing sellers and buyers, market orders are filled. Market orders are therefore used when certainty of execution is a priority over price of execution. Market order is known for being the simplest of all the different order types. The most adept thing about this order is that it does not allow the prices of the commodity to change early.

Limit Order

It is an order which does not specify the desired price of any commodity. Moreover, it does not guarantee that whether the order will be filled or not. Limit orders are of two types like buy limit order and sell limit order.

Buy order limit- It is a particular type of instruction in which the order is entered at a price below the current market price.

Stop order- It is an order which is used for activating an execution at the time of rise in the prices due to the market level. When this limit is reached then the stop order becomes a market order. Stop order does not predict the actual price that will be received in the form of security. There are two types of orders like buy stop order and sell stop order.

Buy stop order

These are used to limit losses on short stock positions and they are known because their value is always placed above the current market price and get filled only when the price of the commodities rises in the markets.

Sell Stop Order

It is an order which is used for limiting the losses on long stock positions and are always placed below the current market price and get filled only when the prices of markets falls.

It can be concluded that financial orders are very much necessary in determining the market forces of supply and demand. Thus, through the help of these financial orders the work of shareholders have become much easier in buying or selling the financial assets. Those days have gone where an investor needed to worry about his shares when the prices of the commodity gets rises or decreases as per the market condition.

If you are a conservative investor then buying any kind of financial asset as per the guidelines specified in different types of orders can be said to be beneficial.