Andy Poon asked:


An option contract is an agreement between two parties to buy/sell an asset (In this case, the asset refers to stock) at a certain price and specific date.

It is called an option because the buyer is not obliged to carry out the transaction. If, over the life of the contract, the asset value decreases, the buyer can simply elect not to exercise his/her right to buy/sell the asset.

There are two types of option contracts - Call options and Put options. A Call option gives the buyer the right to buy the underlying asset, while a Put option gives the buyer the right to sell the underlying asset.

A simple example: Peter buys a Call option contract from Sarah. The contract states that Peter will buy 100 Microsoft shares from Sarah on the 5th May for $25. The current share price for Microsoft is $30.

Note: this is an example of a Call option as it gives Peter the right to buy the underlying asset.

If the share price of Microsoft is trading above $25 on the 5th May, then Peter will exercise the option and Sarah will have to sell him Microsoft shares for $25. With Microsoft trading anywhere above $25 Peter can make an instant profit by taking the shares from Sarah at the agreed price of $25 and then selling the shares on the open market for whatever the current share price is and making a profit.

The $25 value, which is stated in the agreement, is referred to as the Exercise (or Strike) Price. This is the price at which the asset will be exchanged.

The date (in this case 5th May) is known as the Expiry (or Maturity) Date. This date is the deadline for the option contract. At this date, the option buyer is to decide if a transaction of the underlying asset is to occur.

Outcomes: Let’s imagine that at the expiration date, Microsoft is trading at $30, then Peter will buy the shares from Sarah at the agreed $25 and then he can sell them back on the open market for $30 and make an instant $5.

Alternatively, if Microsoft is trading at $20, then buying the shares from Sarah at $25 is too expensive as he can buy them on the open market for $20 and save $5. In this situation, Peter would choose not to exercise his right to buy the shares and let the options contract expire worthless. His only loss would be the amount that he paid to Sarah when he bought the contract, which is called the Option Premium - more on that a little later. Sarah would, however, keep the option premium received from Peter as her profit.

All in all, there are more than 50 strategies you can deploy in options trading by combining many different strike prices and expiration. But do you need to know all?

The good news is you do not have to!In fact, most of them allow you to make money very slowly or limited.



Danny

Timothy Stevens asked:


What is a Forex Call Option?

A forex option gives you the right but not the obligation to buy or sell a currency pair at a certain price on a certain date. The certain price in this case is called the ’strike price’. That is the option gives you the flexibility of choosing where you want to buy or sell the currency pair. The certain date in this case is called the ‘expiry’ or the expiration date of the option.

If you think that the market is going to go up then you would buy a call option. Likewise, if you think that the market is heading down, you would buy a put option. The seller (or “writer”) of the forex call option is obligated to sell the currency pair should the buyer so decide. The buyer of the call option pays a fee (called a premium) for this right.

The buyer of a forex call option wants the price of the chosen currency pair to rise in the future; the seller either expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price.

Call options are most profitable for the buyer when the price of the chosen currency pair has moved up past the strike price greatly. When the price of the chosen currency pair surpasses the strike price at the time of expiration, the option is said to be “in the money“. When the price of the chosen currency stays at or around the strike price at the time of expiration, the option is said to be “at the money”. When the price of the chosen currency pair goes under the strike price at the time of expiration, the option is said to be “out of the money”.

However, to be truly profitable, the gains resulting from the upward movement must also cover the cost of buying the forex call option (premium paid). For example, if the cost (premium) of buying a call option expiry in 1 week’s time is 120 pips then the chosen currency pair must move upwards more than 120 pips past the strike price. If it rises 300 pips above the strike price by expiration your profit would be (300 pips - 120 pips) 180 pips!

What is a Forex Put Options?

A forex put option gives you the right but not the obligation buy or sell a currency pair at a certain price on a certain date. The certain price in this case is called the ’strike price’. That is the option gives you the flexibility of choosing where you want to buy or sell the currency pair. The certain date in this case is called the ‘expiry’ or the expiration date of the option.

If you feel that the market is going to go down greatly then you would buy a put option. Likewise, if you think that the market is trending up, you would then buy a call option. The buyer of the put option pays a fee (called a premium) for this right as the buyer expects the price of the chosen currency pair to drop in the future while the seller expects that it will not.

Put options can only make profits for the buyer if the price of the chosen currency pair has moved down past the strike price greatly. When the price of the chosen currency pair falls past the strike price at the time of expiration, the put option is said to be “in the money”. When the price of the chosen currency stays at or around the strike price at the time of expiration, the put option is said to be “at the money”. When the price of the chosen currency pair goes above the strike price at the time of expiration, the put option is said to be “out of the money”.

Please note that the gains resulting from the downward movement must also cover the cost of buying the forex put option (premium paid) to be profitable. For example, if the cost (premium) of buying a put option expiring in 1 week’s time is 135 pips then the chosen currency pair must move downwards more than 135 pips past the strike price. If it falls 250 pips below the strike price by expiration your profit would be (250 pips - 135 pips) 115 pips!

Forex Options Trading can do a very good model for people who want to do Forex Trading. What you need is a right system, the willingness to work and determination to not give until you reach your goal. If you are willing to take action, then this Forex Trading is suitable for you.



David