Your Option for Trading Stock
Investors have a lot of choices and one of those is the option trading stock options provides. Stock options trading takes place on the major exchanges and is one of the most highly regulated trades. That is good news for smaller investors because it means the option contracts can be bought and sold with safety. Basically, an exchange is an organized marketplace where traders can trade stocks and commodities.
The first exchange listed options became available in 1973 under government regulation. Before the exchanges the options trading mostly took place in the over-the-counter markets. Though large investors dealing in highly customized option agreements still do a lot of over-the-counter option trading, most individual investors take advantage of the exchange traded options.
There are many advantages to using exchanges for trading options.
- Government regulated exchanges
- Exchanges provide clear trading rules
- Efficiently processes trades
- Guarantees contract performance
- Investors can follow prices
There are even more advantages to buying stock options
- Transactions are liquid
- Can create a hedged position
- Can create a speculative position
- Can increase profit potential through leverage
- Can limit risks in most trades
Options listed on stock exchanges have some of the same qualities as listed common stocks. For example, bids are made by potential buyers while offers to sell are made by sellers. In addition, options and stocks can track market price movements. So why not just buy the stock?
There are many reasons why investors might pick the option trading stock options conveys. For example, options have expiration dates so you are not locked into a transaction for an indefinite period of time. Stock options can be used in conjunction with stock purchases to limit losses due to a downward market trend or a falling stock price. Stock options also let you anticipate stock prices you would find favorable with only a small premium payment.
In other words, stock options add versatility to investing that cannot be achieved with only stock buying and selling. The equity option, or stock option, gives an option buyer the right, but not the obligation, to buy or sell stock shares at a specified price by a specified date.
Options are actually derivatives. Derivatives get their value from the security that underlies the financial contract which for stock options is stock. When you buy an option, you are actually buying the right to buy or sell 100 shares of stock because that is the trade unit of equity options.
The terms of exchange traded stock options are clearly defined. You will know up front the strike price, the premium and the expiration date for example. Though you will be watching the price movements of the underlying asset, the options terms are clearly fixed in place. And because the exchanges are regulated, you don’t have to worry about losing your investment due to fraudulent trading. Of course, you will have to carefully choose your broker but quality brokers are registered with the exchanges and have all appropriate licensing.
Most US stock option trades are American style. This means the option holder can exercise the option up to the expiration date.
If you are interested in pursuing the wonderful option trading stock options offers then exchange traded options are an excellent choice. When you are trading options, you want to be spending your time managing your investments.
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Filed under All About Options by on Aug 3rd, 2010. 
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