Option Trading

What is option trading?

An option is like a contract in that it gives rights to the buyer, but not the duty, to sell or buy a primary asset at a particular value on or before a certain date. Options are sold and bought at a value called a premium which is the sum a buyer pays to the seller for the rights for an option. The premium does not remain constant but changes with the market. Which leave us to conclude that an option is similar to bonds and stocks, meaning it is a security as well. Option trading has the following advantages.

Merits of trading options
Efficient, orderly and liquid market

Consistent option contracts will enable you to have an efficient, orderly and liquid market option trading.

Options are awfully adaptable investment tools. Because of this unique reward and risk structure, they can be in a number of combinations with other options or other financial tools to pursue protection and profits.

An option allows you to set the value for a specific time period at which you can sell shares at a premium or buy them at a discount, which is merely a small percentage of what you would pay to acquire the equity completely. This allows you to leverage your investment power at the same time increasing your potential to gain from the price movements.

Limited risk for buyer
Different from other investments which have the risks that are boundless, options trading will offer you the buyer a defined risk. You will not lose more than the initial buying price of the option; the premium. Because you have the rights to sell or buy the securities at a specific date and price, the option will be worthless if the conditions proved by the contract are not met before the expiry date.


Stock Options

Stock options are an investment tool that corporations and security traders use as a way to reward executives. There are two types of stock options; qualified stock options and non-qualified stock options. Qualified stock options are regarded as incentive stock options. With this option, no taxes are charged during the exercise or grant period. Taxes are put off until the stock is sold. However, if the stock is sold before the required period, the sale will be referred to as a disqualifying disposition and taxes will be imposed at the higher individual tax rate.

In contrast, non-qualified stock options are ways a company compensates employees or service providers without paying cash. Instead of paying cash, a company grants an employee or other an option to purchase shares of stock at a fixed price. With a non-qualified stock option, there is an incentive to an employee to engage in a potential increase in the value of stock without having to risk any kind of investment. The company benefits from this kind of stock option because they receive a tax deduction.

To conclude, stock options are efficient investment tools. In addition, there are several benefits of stock options such as: being cost efficient, less risky, having a potential for higher returns and offering more strategic alternatives. Talk with an experienced investor today!