This article is aimed at helping you understand the different terms that are used in the options market. It is important that you are fully aware of these terms and what they can mean to you before you start trading. This way you can be sure that your capital is being protected by your knowledge in the markets, this is still no guarantee because there are no guarantees in the stock market. It is possible to lose your capital even on some of the most low risk options available.
The options markets can seem simple and straight forward but if you want to make money, understanding the concepts will help.
It is vital to know that if you are a resident in the USA there are restrictions to the options that you can invest in, legally. Know these restrictions so that you are not risking your capital and the possibility of being prosecuted.
The aim of the option market is to bid on the stake price, with it rising or falling by the time that the broker has deemed. You will either put a ‘call’ for a rise and a ‘put’ for a fall. This is in essence bidding on the markets as to a rise or fall in the markets.
The important figure that you need to consider in the option markets is the stake price. You need to know the stock that is being offered in the option, you need to know the recent movements. This will give you a better understanding of the potential.
Many people new to the markets often question if it is possible to have a negative stake price. The answer is simply no. The reason behind this would be quite simple. If the stake price is -$10 and you were to purchase this stock, then the broker would be paying you and not the other way round.
There are no brokers who would be willing to do this option unless they were set at making a big loss.
This is why it is important to learn about the markets before you try and invest your capital. You are risking too much if you do not understand the basic principles of the market.
You need to understand the terminology of the market that you are looking to invest in. You need to understand the concept behind each of the outcomes so that you are prepared. You also need to be able to afford to lose the stake money that you have put for the option. If you can’t afford to lose this money then you shouldn’t be choosing options as an investment strategy.
The options markets are not won through pure ignorance, they are played by those that understand the potential, those that are able to do the homework so they are going to put the right option in. But also the people that use the option for investing know when to stop and how much of their capital they can afford to lose.