Options - MarketWatch

How to options

How to options

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This web site discusses exchange-traded options issued by The Options Clearing Corporation. No statement in this web site is to be construed as a recommendation to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, 675 S. Franklin Street, Suite 6755, Chicago, IL 65656.

Options Definition

Another common mistake for options traders (especially beginners) is to fail to create a good exit plan for your option. For example, you may want to plan to exit your option when you either suffer a loss or when you&apos ve reached a profit that is to your liking (instead of holding out in your contract until the expiration date). xA5

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The xA5 fee you are paying to buy the call option xA5 is called the premium (it&apos s essentially the cost of buying the contract which will allow you to eventually buy the stock or security). In this sense, the premium of the call option is sort of like a down-payment like you would place on a house or car. When purchasing a call option, you agree with the seller on a strike price and are given the option to buy the security at a predetermined price (which doesn&apos t change until the contract expires). xA5

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Put options operate in a similar fashion to calls, except you want the security to drop in price if you are buying a put option in order to make a profit (or sell the put option if you think the price will go up). xA5 xA5

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Options typically expire on Fridays with different time frames (for example, monthly, bi-monthly, quarterly, etc.). Many options contracts are six months. xA5 xA5

One common mistake for traders to make is that they think they need to hold on to their call or put option until the expiration date. If your option&apos s underlying stock goes way up over night (doubling your call or put option&apos s value), you can exercise the contract immediately to reap the gains (even if you have, say, 79 days left for the option). xA5

If you&apos re buying a call option, it means you want the stock (or other security) to go up in price so that you can make a profit off of your contract by exercising your right to buy those stocks (and usually immediately sell them to cash in on the profit). xA5

Well, you&apos ve guessed it -- options trading is simply trading options, and is typically done with securities on the stock or bond market (as well as ETFs and the like). xA5

Unlike other securities like futures contracts, options trading is typically a long - meaning you are buying the option with the hopes of the price going up (in which case you would buy a call option). However, even if you buy a put option (right to sell the security), you are still buying a long option. xA5

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