Stock Options

What Are Stock Options?

If you are interested in the exciting world of the stock market, you should be familiar with stock options. This term refers to a limited time contract between buyer and seller. The contract stipulates that the buyer can purchase the specified stock but is not required to, and that the seller must sell the specified stock at the agreed upon price. Of course once the contract expires this agreement is no longer valid. Options trading is nothing new, it is estimated that the first form of options trading took place around 7 BC in Greece, but instead of stocks the commodity was olives.

There are particular ways to define options trading. One is the date of expiration. This is when the contract ends. The option is based on an underlying asset. Then there is the exercise price, also called the strike price. This is the amount for which the asset is purchased or sold if the holder of the option chooses to do so. There is a difference between options in the United States and Europe. In the United States, the buying or selling can happen at any time period during the contract period. In Europe, the option can only be exercised on the date of expiration.

You may hear the term ATM tossed around. This is not an automatic teller machine, at least not in the world of stock trading. This acronym stands for at-the-money, which means the strike price is very close or identical to the current price. Then there is the acronym OTM, or out-of-the-money. This means the price is too far from the strike amount therefore there is no good reason for the options holder to take action on the contract. Finally an ITM, which means in-the-money, is a position that is profitable for the contract holder.

As you can see, stock options allow traders the potential of profit without a lot of risk. Even those new to stock trading can delve into options trading with a little knowledge. There are a plethora of books, newspapers, magazines and even educational courses which can teach even the most clueless individual how to trade. Before you do decide to invest money, make sure you are well schooled in trading. Also, it is a good rule of thumb to never use money you can't afford to lose. That way if you lose money it may be disappointing but not devastating.

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