Posted on 12 March 2012. Tags: options trading for dummies
If your past experience in the stock market is limited to basic equities, then you can profit from learning about options trading for dummies. Even if you do not intend to get involved in trading options, it is always a good idea to learn about other financial instruments. Options, futures and foreign exchange are just three examples of investments that differ from the typical investment in stocks and bonds.
Options trading for dummies must begin with a lesson in vocabulary. There are a number of new terms to learn. Start with a definition for options. Options are derivative financial instruments. Essentially, they are similar to futures but have a few, important differences. Like futures, options are contracts for future transactions involving some underlying asset.
One of the key differences that should be explained in options trading for dummies is the distinction between two types of options. A call option gives the buyer the right to buy an asset at a specific price. A put option is just the opposite. It gives you the right to sell an asset for a specific price.
The great attraction of an option is the buyer’s ability to abandon the contract if things do not look favorable for a sale. Options mitigate the possible negative consequences of a bad purchase but they do not remove risk completely. If an options buyer decides to back out of the option, he or she must pay the premium, which was part of the contract. However, the buyer can save himself from a severe loss if the price of an asset drops or rises too much. Options trading for dummies should teach you how to decide when it is right to exercise these options.
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