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Explain the Basic Specifications of Stock Options



Before a beginner knows about the definitions and meanings of the most fundamental terminologies associated with stock options, it is crucial to revive the basic definition of options trading. When it comes to stock options, 2 parties undergo a contract between themselves, wherein the stock option buyer can buy/sell shares of an underlying stock at a predetermined price and within a specific period of time, from the option seller. Now, there are certain terms, which people involved in this form of trading, should be aware of.

The commonest term is 'option class' which means there are 2 classes of stock options, namely, call options and put options. This term signifies the buyer's or the seller's right to buy or sell options, according to their strategies.

The next term to know about is 'strike price', which signifies the stock price of the particular option or asset, which is to be bought or sold, at the onset of the deal. The relation between the strike price and the market value of the asset in question, determines the option's premium and its trading value.

Let's come to the next important term called 'premium', which can be often found in the stock options contract. In exchange of the right to buy or sell options, which is conferred to the option buyer, he/she has to pay a specific price to the option seller, and this amount is known as premium. The price of the premium is determined by the volatility of the asset, its strike price and time of expiration.

Another word that is most commonly used amongst options traders is 'expiration date'. This indicates that there is a particular date or time, after which the stock options hold no more financial and investment value. When a stock option crosses its expiration time, it generally becomes worthless. Every nation or stock market has specific expiration date for their stock option assets.

The next to come across is called 'option style', which basically comprises of 2 types of trading options, namely with 'American style' and the 'European style'. Both the styles are distinct in its own ways. The American style options exercise trading till the time expires, while European option gets exercised only on the time of expiration. Presently American style is more famous than the later.

The next and the most important term in this field is the 'underlying asset', which indicates the real security which the buyer acquire from the seller, while the exercise of the option. Now, an underlying asset may mean shares of a company, commodities, invoices, currencies and so on.

A trader should also know about the term known as 'contract multiplier', as it indicates the quantity of the specific underlying asset, that needs to be either bought or sold during trading activities.

Knowing the meaning of these specific stock options related terms always helps the beginners to be acquainted with some fundamental phenomenon in the world of options trading. At the same knowing these basic terminologies forms the foundation to do further research and studies about the various strategies and tactics in this field.

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