Nov 1 2010

Have You Learned The Market?


Stock Options are derivative instruments which count on an underlying security like bonds, stocks or futures. They are fundamentally a contract between two parties which give the buyer or the seller the right to buy or sell a stock at a particular predetermined price. Options are one or more of the cheapest ways to enter the stock market. While the underlying stock may be valued at several hundred dollars, options are rarely sold for more than a few dollars. Although your investment is low, it is fairly simple to lose money when trading options, simply since they move to zero value on the expiration of the choices contract. This is probably one of the factors why you ought to carefully study a stock option chart before putting your cash on this investment.
The charts employed for option trading are referred to as day trading charts and these are the same tools that are normally employed for short term/day trading. These charts offer valuable facts on the trend of a particular security and also its anticipated movement someday. Stock charts are graphical representations of the trading volume and price of a particular share over a specific time period.
Two common charts employed for option trading include the volume and the stock price history chart; this graphical representation provides you with facts on the amount trend of a specific security over a period of time like 3 months or 30 days or even 14 days. For example, an option trader would like to view the volume and historical charts of a stock for the last 30 days prior to investing in an options contract.
The next sort of chart is referred to as the stock option chart and this offers facts about the amount of the choices contracts and their expiry periods. These charts are offered individually for put and call options dependent on the sort of investment vehicle that you are curious about.
A put option is for individuals who would like to sell a security at a particular price on or before the expiry date of the choices contract. Alternatively, the call option is acceptable for traders who are trying to secure their profits by locking in a particular buy price.


The direction in which the underlying stock moves will have a direct concerning the amount of the choices contract. For example, when a particular stock shows a bearish trend (downward price movement), the amount of the call options for that security will move up. Because you will have the right to sell the stock at a particular price; no matter the going rate of the security, a downtrend can create a risky scenario for the other person in the choices contract with you. Although the amount of the security plunges, he will need to buy the stock at the predetermined rate, that can amount to huge losses.
So, it’s imperative to carefully analyzer the trend formation in the stock charts prior to investing in options. You will see that these charts are the ideal tool for using technical analysis. Through this method, you will be able to determine charting trends and anticipate the direction of price movement someday. All of these factors should be weighed before thinking about options investments
Because the amount of the underlying security is a significant factor, make it a point to study the fundamentals of the company along with the charts before making your decision to put money into an options contract.

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