Tag: Options

Stock Options – Comparing The Two Types

The trade for stock options is fast on the rise in the market these days. With its many trading benefits and high promises for financial profit, many have become quite interested in buying and selling such contracts. Let us learn about the two types of these options in order to better understand how to trade them.

Knowing how each of these options would work to your benefit as the contract holder can surely come in handy with the volatile trends ongoing in the stock market.

The two major types of option contracts are the call option and the put option. Each of these contracts holds rights and benefits for their owners. Let us discuss each of these and how they can be useful to you.

Call Options

A call option is a type of contract that gives its owner the right to buy the underlying stock at a certain fixed price (also called the strike price) within a specified time frame, which should be on or before the expiry date. The buyer of a call holds the right to purchase shares at the strike price until the date of expiry. The writer or the seller of the call on the other hand, holds the obligation.

If a call buyer chooses to exercise his or her option by deciding to purchase the underlying share, then the call writer is then obliged to sell his or her share at the negotiated strike price.

For example, an investor purchases a call option from a certain company with a strike price of $10, which will expire in two months, then that buyer holds the right to exercise his or her option by paying the value of $10 for each share. The writer, on the other hand, would be obligated to give up the shares in the exchange for $10 for each of them.

Put Options

On the other hand, a put option is the total opposite of the previous. It is a contract that allows one to sell the underlying stock at a certain price on or before the expiry date. A put buyer holds the right to sell shares at the strike price, and following this, a put writer will then be obliged to sell at the negotiated price.

And so, if the investors who have purchased the stocks of a company would have growing concerns that business may not fair a current market slump, then they can buy a put option at a certain strike price in order to ensure the safety of their gains.

These investors would then hold the right, until expiry, to be able to sell their stock shares for the same amount they paid for them. Sellers of the put are then obligated to buy back the shares. If in the event that the company really did not do well during the market slump, then this could hurt on the part of the put seller.

Knowing about the differences between these two types of options are the first major step to guide you in making decisions in trading stock options. Be sure that you know what risks are involved in each type, so you would be able to know whether to buy a call or put option with the current behaviors of the stock market.

Stock Options – Comparing The Two Types

The trade for stock options is fast on the rise in the market these days. With its many trading benefits and high promises for financial profit, many have become quite interested in buying and selling such contracts. Let us learn about the two types of these options in order to better understand how to trade them.

Knowing how each of these options would work to your benefit as the contract holder can surely come in handy with the volatile trends ongoing in the stock market.

The two major types of option contracts are the call option and the put option. Each of these contracts holds rights and benefits for their owners. Let us discuss each of these and how they can be useful to you.

Call Options

A call option is a type of contract that gives its owner the right to buy the underlying stock at a certain fixed price (also called the strike price) within a specified time frame, which should be on or before the expiry date. The buyer of a call holds the right to purchase shares at the strike price until the date of expiry. The writer or the seller of the call on the other hand, holds the obligation.

If a call buyer chooses to exercise his or her option by deciding to purchase the underlying share, then the call writer is then obliged to sell his or her share at the negotiated strike price.

For example, an investor purchases a call option from a certain company with a strike price of $10, which will expire in two months, then that buyer holds the right to exercise his or her option by paying the value of $10 for each share. The writer, on the other hand, would be obligated to give up the shares in the exchange for $10 for each of them.

Put Options

On the other hand, a put option is the total opposite of the previous. It is a contract that allows one to sell the underlying stock at a certain price on or before the expiry date. A put buyer holds the right to sell shares at the strike price, and following this, a put writer will then be obliged to sell at the negotiated price.

And so, if the investors who have purchased the stocks of a company would have growing concerns that business may not fair a current market slump, then they can buy a put option at a certain strike price in order to ensure the safety of their gains.

These investors would then hold the right, until expiry, to be able to sell their stock shares for the same amount they paid for them. Sellers of the put are then obligated to buy back the shares. If in the event that the company really did not do well during the market slump, then this could hurt on the part of the put seller.

Knowing about the differences between these two types of options are the first major step to guide you in making decisions in trading stock options. Be sure that you know what risks are involved in each type, so you would be able to know whether to buy a call or put option with the current behaviors of the stock market.

Trading Options And Futures – Comparing The Two Types Of Contracts

In trading, it is quite common for the terms options and futures to be used interchangeably. Although these two contracts have a lot of similarities when it comes to principles, they are actually two very different things and therefore interchanging them when conducting trades in the market can be a very lethal mistake for anyone.

Let us learn the differences between these two contracts in order to prevent making the wrong decisions in buying and selling rights for stocks or commodities. Through this, we may just be able to prevent risks and maximize chances for profit.

What Is An Options Contract?

An option is basically the right to buy or sell a specific amount of stock, currency, or whatever commodity offered in the market. This contract basically allows an individual to enjoy, but to necessarily become obligated, to exercise these rights. This contract can only be valid for a specific period of time, and commodities traded can only be bought and sold at a certain fixed price.

What Is A Futures Contract?

On the other hand, a future is a transferable contract that requires the delivery of a certain stock, currency or whatever commodity traded. Like an option, the delivery of the trade is done through a fixed price stated in the contract and within a time frame, so one should not go beyond the expiry date.

However, it is very important to take note that a holder is obligated to exercise the conditions of the contract unlike in options where the holder can have the liberty of deciding.

The Differences Between Options And Futures

Aside from the fundamental difference between the two contracts on rights and obligations, there are also other differences that include commissions, the size of underlying stocks or commodities traded and how gains are realized.

In a futures contract, an investor has the liberty to sign into the contract without paying upfront. However, an investor cannot take hold of an options position without paying a premium to the contract holder. The option premium therefore serves as payment for the privilege to not become obligated to purchase the underlying commodities in cases wherein there are unfavorable shifts in prices.

Another major difference between options and futures is also the size of the underlying positions that can be traded. Usually, futures contracts would include much larger sizes for the underlying positions as compared to that included in options contracts. Because of this, the obligations included in futures make it riskier for a contract holder to trade due to the possibility of losing so much.

Lastly, the two contracts differ with how gains are received by parties involved. For options contracts, gains can be attained in three methods. Either the holder exercises the option, purchases an opposite option, or waits until the expiration date arrives to be able to collect the difference between the price for asset and the strike price, so he or she could get profits. However, profits for futures contracts can only be realized by either taking an opposition position or through the instant change in the value of positions at the end of each trading day.

Knowing about the differences between an options contract and a futures contract can help broaden your knowledge in stock trading, and this can surely prevent you from making the wrong decisions if ever you decide in joining this particular arena.

Remember to never trade without doing your research and fully understanding what contracts you are dealing with. If you just take the extra step to acquaint yourself, then you just might be able to spare losing so much money.

What You Need To Know About Employee Stock Options

You may have heard the mention about employee stock options quite a few times, but may have wondered what these are exactly and how you as a common employee can actually benefit from it. Let us learn in this article about the whole concept of employee stock options (ESO) and how they can be of great benefit to you.

What Is An Employee Stock Option?

Employee stock options (ESO) are contracts granted to specific employees of a certain company that give rights to trade shares in the company at a fixed price and within an indicated time period. Unlike a typical option traded in the exchange however, there is no put component included.

The basic goal for this type of concept is actually to boost business within an institution. By giving employees the benefit to buy option shares of the company that they work for, they would be motivated to strive harder and work for good business production. In theory, when stocks go up, and when employees perform at their best to ensure that their investments would pay off, then business would reach its peak of high performance.

Even if the theory mainly tries to align the incentives between the major shareholders of a company and the employees, many critics have pointed out however, that there is an enormous difference between owning an option and actually owning the underlying stock.

In cases wherein stocks go down, the owner of an option would lose the opportunity of a bonus gain, but would not necessarily experience the same loss of investment from an actual stockholder. But still, at the moment, this system has proven to be of very big help to a lot of major companies in the world.

How Do I Exercise My Employee Stock Option?

The thing that people have to know about exercising employee stock options is that in most companies, there are no brokerage firms available and so, you have to do most of the work on your own.

A stock needs to be purchased by a licensed representative. And so, you have to call a broker to inform them that you are interested in exercising your options. They can do all the needed paperwork for you and can even contact your company to speed up the ongoing transaction.

Most people would opt to exercise through a cashless method in which you can use margins to purchase stocks instead of cash. Margins are actually loans that are granted by departments because they guarantee quick repayments and take not that there are not interests assessed.

Once you have made the purchase and have sold your stock, you can pay for your loan as well as the taxes. Just make sure that the portion required for you to sell is small enough for you to be able to retain profit.

Employee stock options are great tools that benefit both the company and its employees. It is a great way to ensure productivity and fluidity within an institution’s financial market and this can provide many opportunities for gains to a lot of people.

If you are one of those that work for huge companies who offer ESOs, take the opportunity to invest. This may not always be as easy, but once you know how to smartly handle such trades, then this can surely give you much promise for a good and promising investment.

The Difference Between Trading Stocks And Stock Options

In the stock market industry, the trade for stocks and stock options are often interchanged and many may be confused between the concepts behind these types of trades. However, what you should know is that these two have very different characteristics from each other, and using them interchangeably can be very lethal if you want to engage in the stock trading game.

Knowing the difference between these two would not only save you on making serious trading mistakes, but perhaps, you can be guided on making a smart business decision on which particular trade you would actually want to make your investments.

Stocks Versus Stock Options

By definition, stocks are actually shares of a particular company that can be traded through the act of buying or selling by an investor. If you happen to own a particular stock from a company, you are entitled to certain rights, which may include a profit share from earnings. You may also have the liberty to sell your share of stock if you no longer desire it.

A stock option on the other hand, is not the stock or share of the company itself, but it is actually the rights for a certain stock. It actually allows you to buy and sell company stock at a set price in a certain time period. However, you do not gain the profits from the company itself.

Take note that in doing transactions for stock options, there will always be a buyer and a seller, and this may not always hold true when compared to stocks. When you sell stock options, you are actually creating a certain degree of security for the company as well as for yourself. In this way, the parties involved can make sure that money is actually made to the frequent trade that happens.

Comparing The Benefits

In comparing the benefits of trading stocks and stock options, many experts would claim that stock options might be a promising gamble for companies and individuals, especially if you have adequate experience in the trading game and can substantially use very good strategies to survive. However, the same results might not be expected if you are only a beginner.

What makes a lot of experts prefer options trading is usually because in this particular trade, no matter what would happen to the underlying security, an option buyer cannot lose to more than that of the initial price paid for the rights. Therefore in trading options, there are fewer risks involved on the part of the buyer, especially when it comes to the possibility of losing a lot of money. And it may even give promises of profitable gains.

But on the other hand, the seller may experience greater risks. There may be a possibility that one has to deliver or take deliveries of the stock shares. Unless the option is actually covered by a different option, then the seller may end up losing much more than the stock option’s original price.

And so, if you are not well skilled and knowledgeable about how you can prevent severe losses, then the best way for you to play the stocks trading game is to stick with the more traditional trading of stocks as this can be easier.

However, if you do believe that you can manage then options trading may give you many promising positive results. Just make sure that you take the time to understand concepts and strategies behind stock options before you actually start trading.

The Advantages Of Trading Stock Options

Just recently, options in stock trading have been getting the attention they deserve from many traders. However, for quite some time now, investing on options has created quite a stigma in the market especially with the financial media and a few popular figures attaching such implications that trading options may be too risky or dangerous.

What you should knowing about trading options however, is that there are a lot of advantages that one can get from it. And as long as you are smart in handling your trades and with the use of the right strategies, you may be able to prevent risks from actually happening.

Cost Efficient

One thing about stock options is that they are well capable of leveraging or borrowing money in order to increase returns. It can be very possible for an investor to obtain option positions that copy stock positions without going overboard with the cost. A strategy known as a stock replacement, allows mimicking stocks possible but in a cost efficient way.

For example, for you to be able to purchase 200 shares of a $50 stock, you must pay $10,000. But if you were going to purchase a couple of $20 stock options, with the options representing 100 shares each, then you would only have to outlay $4,000 instead of $10,000. As an investor, you would be able to gain $6,000 for you to use in your discretion.

Of course, the whole process may not be as instant and as simple as the example provided. But if you are able to choose the right stock option for the process, then you may be successful in your attempts for this strategy.

High Potential Returns

Another fact about stock options is that you can actually spend less money, but still make almost the same profit. Because of this, you can surely expect to gain a much higher percentage of returns as compared to normal stock trading. Of course, this would mean that you can actually earn so much more and your investment can surely pay off.

More Investment Alternatives Are Offered

Another very good advantage in trading options is the fact that they can offer more strategic alternatives for investment as compared to traditional stocks. Because options are very flexible, there can be a lot of way to use them.

Take in mind that options are actually the rights to trading a particular stock, and so, there may be various ways that an investor can actually use these rights to benefit him or herself.

The use of these options allow an investor to trade not only through stock movements, but through the passage of time and unpredictability in the market as well. And this can be very beneficial because most stocks rarely move significantly. Options strategically offer alternatives for a trader to do business in every type of market.

These are only a few of the major advantages of trading stock options, but as you can see, they are enough reason to tell you that going into this type of market can really be beneficial. With the low costs, direct access to stock options through the Internet, and with such benefits at hand, it is no wonder why stock options trading have become a part of the financial circles these days.