Buy Stock Option
Conventional trading in stocks, commodities, currencies, etc., is on its way out after introduction of what is known as derivative trading. Derivatives represent an underlying stock, commodity, currency etc. However, the person using derivatives for trading is not required to hold any such stocks, commodities, currencies, etc.
Futures, and options are two types of derivative contracts. In fact, options are a type of futures contract. In futures contract, a person may agree to buy a stock at a future date, at a specified price, and it becomes an obligation. This is called going long. Alternately, the person may sell some stock not in his or her possession, and thereby become obligated to purchase the stock at a future date. This is going short. The converse of this, i.e., buying stocks now, and selling in future is the conventional way of Option Trading on stock markets. Effectively, futures contracts are opposite to the conventional contracts on stock markets.
Options are more refined versions of future contracts. Here, the option buyer is only buying a right. He buys a right to purchase the specified stocks, at specified price, on or before a specified time. This right is bought for a price that is called premium. The date by which the option should be exercised is termed as strike date, and the price at which the option holder may purchase the stock is termed as the strike price. There are, of course, the usual commissions involved.
Stock options may be used to sell or buy stock at a future date. The option that allows the holder to sell at a future date is known as put option, and the option under which the holder of the option buys at a future date is called the call option. Call option is similar to long of futures contracts, except for the obligation. Stock options have caught fancy of people because the trader using these derivatives does not need to invest much, as the option comes at much less value than the price of share it represents. Unlike in the regular futures contracts, it is not obligatory for the options holder to purchase a stock, when he or she is likely to make a loss through such a purchase. Therefore, the option holder may confine his or her losses to the premium amount plus commissions and other expenses. Technology has also contributed to this popularity of stock options. This is because it is now possible to enter such contracts within seconds, and even alter any such orders within seconds, if the investor feels that the trends are not in the right direction. This becomes important in intra day trading, where commission charges, etc., are lower and therefore, the trader can define the sale price that would result in more profit, or at least, lower the loss.
Put and call stock options can be used effectively to mitigate losses, and yet opening up possibility of making profits. Of course, anybody desirous of trading on stock markets must study stocks that they are planning to invest in. Therefore, the investor should have studied the underlying stock of the option. After understanding the financials, if the investor is of the opinion that the stock is likely to be north bound, then using a call option is better. If, however, the investor feels that the stock is likely to slip substantially, then a put option would earn the investor some profits. Traders cleverly combine call and put options to reduce losses. Using short and long strategies of other future transactions are also possible with stock options. Losses arising from stock options are minimal. Stock options tend to get cheaper as they come closer to expiry date. However, at such time, they also carry more risky.
Stock options may be bought either through brokers, or through online systems. Futures and options methods of trading have now spread to other markets as well. Therefore, there are gold futures, gold options, currency futures, currency options, oil futures, and oil options, to name a few. The differences are in underlying asset, of course. Apart from this, the units that the options represent differ. Therefore, when an options trader is buying stock option in stock markets, it means he is buying option for purchasing 100 stocks underlying that option. Unlike this, in oil market it means, the options trader is agreeing to purchase 1000 barrels of oil. Similarly, in case of heating oil options, the purchase represents purchase in gallons. Gold options can be bought from bullion banks that are listed with London Bullion Market sell gold options, provided the person desirous of buying gold options has a private bank account with them. US based traders can also purchase gold options from the New York Mercantile Exchange's COMEX division.