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how to trade stock options for beginners - Understanding Options
Understanding Options
Options are financial instruments that can be used effectively under almost every market condition and for almost every investment goal. Among a few of the many ways, options can help you:
Protect your investments against a decline in market prices
Increase your income on current or new investments
Buy an equity at a lower price
Benefit from an equity price’s rise or fall without owning the equity or selling it outright.
Benefits of Trading Options:
Orderly, Efficient and Liquid Markets
Standardized option contracts allow for orderly, efficient and liquid option markets.
Flexibility
Options are an extremely versatile investment tool. Because of their unique risk/reward structure, options can be used in many combinations with other option contracts and/or other financial instruments to seek profits or protection.
Leverage
An equity option allows investors to fix the price for a specific period of time at which an investor can purchase or sell 100 shares of an equity for a premium (price), which is only a percentage of what one would pay to own the equity outright. This allows option investors to leverage their investment power while increasing their potential reward from an equity’s price movements.
Limited Risk for Buyer
Unlike other investments where the risks may have no boundaries, options trading offers a defined risk to buyers. An option buyer absolutely cannot lose more than the price of the option, the premium. Because the right to buy or sell the underlying security at a specific price expires on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the option contract are not met by the expiration date. An uncovered option seller (sometimes referred to as the uncovered writer of an option), on the other hand, may face unlimited risk.
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