Getting to option trading, you must be clear about its use of the principles of how to trade the financial instrument. In addition, we must also be able to own strategies and tactics of the share options. Options Trading in a way reminiscent of trading in futures. Just as in the futures options exist certain parameters. Anyone who is familiar with the principles of futures trading, be sure to master the options market, not bothering to unnecessary acquisition of skills. Between these two assets, there is little difference. But all the difference concerns only the liability for the acquired assets.
Option, unlike futures, is only entitled to the opportunity to use the price difference with the favorable circumstances with regard to pricing policies prevailing in the market at the time of exercise. In other words, the option can be used as a means of insurance against price increases for selected goods, currency or securities. But in the case of quotations fall, he has the right not to apply to the purchase. But this similarity to futures option is only in terms of price stability.
In its function option is more like not even futures, and insurance. The premium paid for the option holder the right to purchase goods for the forecast - in the case of price reduction - simply work as payment risk, as in the case of insurance. However, upon the occurrence of the price, more than at the time of the transaction, the option buyer will be paid the difference in the current price. As with the design of the insurance policy, the purchase option also depends on several factors that affect the amount of the premium. Firstly, the paramount importance of the market volatility. Secondly, at the conclusion of the contract and will play the role of price. Especially will be noticeable amount of the premium at the strike price, is too close to the price prevailing at the moment of acquisition of the option. The third determining factor affecting the size of the payment of the option, is the size of assets subject to insurance.
On which side of the trade
In such a situation it can sometimes seem that there is a difference in risk between the seller and the buyer. However, actually, both the risk of the situation. And then, - it is provided that can not accurately predict the market situation. Therefore, the question of which side of the floor, - a rhetorical question. Of course, there are some points that characterize the risk positions both cases.
But they are not so important to be fundamental when choosing the position. Especially since many settings options can be put in one number, and buyers and sellers in terms of financial risk. But it is still necessary to consider some points at the conclusion of the contract of options. In the market there are two categories of membership options, which, because of their circumstances or seek to protect themselves from unexpected price fluctuations (these are called hedgers). Or to make a profit, regardless of the possible risks (speculators). In the first case, the risks are less restricted, but profits can grow in multiple proportions. In the second case, the risk is quite low, their sizes can be limited only to a small loss by difference.
Just low profits, and, though it may be repeated in terms of the frequency of transactions.
Terms and conditions of mutual settlements between buyers and sellers of options are based on certain factors. These factors include all the parameters of the options that should be considered for conducting profitable trade. Otherwise trade will be like a game of roulette. Influencing factor is the type of option. There are US and European types of options. Their difference lies in the fact that the American types of options are more liberal terms for their execution. In other words, they can be used throughout the entire period during which the option functions as a contractual agreement.
Unlike American options, European style suggests a more severe parameters in respect of deadlines. European option must necessarily be exercised exclusively at the date of exercise. This attitude of the European type options more closely resembles conditions on futures trading. However, demand for both the type of option. Also a huge role in the options settings plays an expiration date.
Generally, all terms of option trading depends on the values of the proposed exchange. Yet another option has a strike price - ie the price at which the option will be exercised. Affect the options trading and some other parameters, such as - the type of underlying asset, the size of premiums paid.