Stock Option Trading
The stock is a share of a company and it is the smallest right or unit of ownership in the specific company. The options on stocks like equity or shares of a company are termed as stock options and in option trading platforms their trade is called stock option trading. Stock option is a contract between the buyer and seller to exchange underlying stock, the stock option awards the buyer or seller mandatory power to buy (call option) or sell (put option) an underlying stock at the expiration of option contract but the investor is not obliged to so.
The option trading is actually buying and selling of the privileges of securities or shares and not the actual stock. It is the most successive trade in recessional economic conditions. In stock trading buyers speculate the on the price direction to capitalize their expectations about the underlying stock. The stock option of an underlying asset is a standardized option contract.
In stock option trading, you buy a call option or a put option of an underlying stock in place of a stock. In stock option trading the risk involved in stock trading and margins of payout are predetermined. The price of an underlying stock is quite small as compared to actual stock in any future or stock exchange. It gives you the opportunity to bet on the most expensive stocks with a limited capital. The following example will clarify the difference between a stock trading and stock option trading and help you to understand the concept of high payout with limited capital investment.
Suppose Yoav and James has decided to invest in a company ABC stock. James opted for buying 100 shares of a company ABC in a stock market at a price of $1000 with an expectation that price would rise to $40. Yoav has decided to buy a call option of the same company ABC by investing $200 for 100 shares of the company with strike price of $40.
If at expiry level their predictions comes true and price is at $40 they both will enjoy a profit of equal amount. Now suppose that stock is at $30 in market at the expiry time then James would lost more than half of his investment almost $450 and Yoav will loose only $200 .
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