Guide to Options Trading for Beginners

Guide to Options Trading for Beginners
By [http://ezinearticles.com/?expert=David_Rivera]David Rivera

Options are considered as derivatives as these financial transactions are based on the value of assets or underlying securities. Unlike stocks, options expire on specific dates and they have no specified fixed number when it comes to its availability. Most people may not really understand how options work but some of them have been using it in their trading business. Beginners have to understand that there are two types of options that they can work on. The first one is the call option where they can buy a stock for example at a given price before a specified date for example. This may likened to buying security deposits.

Traders pay for the option premium when they buy call options. This payment gives them the right to buy the underlying asset at a pre-determined strike price in the future. Traders may not actually buy the stock for example because they are not obliged to do so but in the process, they will have lost money in terms of the option premium if they simply wait for it to expire. The second type of option that they can transact with is called the put option. Traders can sell the underlying asset at a price agreed and at a specified date. Put options in this case may be likened to insurance policies.
Traders can exercise their put option and they can sell the asset at an insured price. In case the price of the underlying asset goes up, they do not need to exercise their put option and their only cost incurred is the premium. The call and the put options are used by traders in order to lessen the risk that they are taking. Those who buy options are given the right to exercise. Traders who would like to exercise their call option may buy the underlying security at the given strike price and those who would like to exercise their put option may sell it at the price agreed upon.

Although call and put traders are given the right to buy or to sell, they are not obliged to do so. They may decide to exercise their rights depending on their analysis of the market. There are different ways for traders to liquidate their options aside from exercising their right. They may liquidate through closing a buy or a sell or they may simply opt for abandonment. Traders may choose to abandon their options in case the premium that is left is lesser than the cost of liquidating it.
There are many ways to trade futures options. You can use different techniques that combine   trading futures options together to trade with little risk. Professional traders always think about limiting their risk. Whether you trade options or not, you should always set loss limits. Learn more at http://www.deltaneutraltrading.com/optin/ezines.html

Article Source: [http://EzineArticles.com/?Guide-to-Options-Trading-for-Beginners&id=7574710] Guide to Options Trading for Beginners