In any financial markets, the most effective and efficient trading strategies are based on the “Supply and Demand” theory. In early 1970s, when Option was first introduced to the market, it was mainly focusing on risk management, and steady income strategy. The large financial investment firms and investors was using option as an alternative income earning vehicle during the bearish market and bad economy. So, what is option? Options are contract that gives the holder the right, but not the obligation, to buy or sell the specific amount of underlying asset at a specified price during a specified period of time.
Basic features of option, there are two basic functions in option trading market called “Call” and “Put”. Call is giving an investor a right, but not the obligation, to purchase any underlying securities at a specific price and time. Put is giving an investor a right, but not the obligation, to sell any underlying securities at the specific price and time. Typically stock options are usually traded at 100 shares per contract. Each option has a buyer, called the holder, and a seller, known as the writer. If the option contract is exercised, the writer is responsible for fulfilling the terms of the contract by delivering the shares to the appropriate party. In addition, In the case of a security that cannot be delivered such as an index, the contract is settled in cash. For the holder, the potential loss is limited to the price paid to acquire the option. When an option is not exercised, it expires. No shares change hands and the money spent to purchase the option is lost. For the buyer, the upside is unlimited.
Options, like stocks, are therefore said to have an asymmetrical payoff pattern. For the writer, the potential loss is unlimited unless the contract is covered, meaning that the writer already owns the security underlying the option. Options are most frequently as either leverage or protection. As... [continues]
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