Understanding Option Trading Basics

A successful execution of options strategies depend on a thorough understanding of option trading basics.

The very first few questions in your mind when you start to learn option trading will be:

1) What are Stock Options?
2) Places where options are traded
3) Rights and Obligations of Option Traders
4) Advantages and disadvantages of options?

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After learning these fundamental, you will need to know what is the;

5) Options expiration dates
6) Strike price
7) Stock option quotes naming convention
8) In the money, out of the money and at the money options
9) Intrinsic Value and Time Value
10) Options open interest
11) Exercise options and options assignment procedures
12) Factors that influence option valuation

Below is an example of option table for Caterpillar Inc. (CAT). All these quotes will not be so confusing after you have learnt the basic option trading knowledge.

A complete understanding of the option trading basics will help an option trader to decide which option strategies is most suitable to him, or is he suitable for trading option.

One of the important issues to take note is that an option buyer can lose his entire investment in a short time. Uncovered option seller may be subjected to a even bigger financial risk.

Keep in mind that most option traders have many years of trading experience.

So don't expect yourself to be an expert in options trading after absorbing the above information.

On the other hand, do not feel intimated by the large amount of information that is coming your way.
Take your time and learn at your own pace.

If you have understood the fundamental of option trading and the risk involved, let's move on to find out how the various options trading strategies may help you to profit in different market conditions.

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