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| Stock Options | |||||
Stock
Options One
of the trading types in the stock market is stock options. Summary:
1.
Speculation 2.
Hedging 3.
Types of Options 4.
Illustration on working of options. On
two accounts the trading of option by the investor is done. The first
one is to speculate and other one is to hedge. Speculation
The
stock or securities after getting included does not stay stagnantly at
the listed price. Its value may go up or down. The traders play on this
movement. The kind of gamble involved on the movement of stock is known
as speculation. The gains are not confined on the market movements. The
functionality of option is such that accumulation of gains can be made
even when the market tends to go up, down or sideways. Also, it should
be noted that one can get huge money or loss of money has the distinction
of speculative. One should analyze it properly and correctly the magnitude
of volume and timing, also the direction in which it is going. Anticipation
should be done for the fulfillment of profits. One should have right knowledge
in evaluating the changes taking place in the stock price and the range
of period it is bound to happen. The other causes also contribute to the
change in the price of a stock. There are lots of doubts in the minds
of the people with more risks why people are still investing in options.
This is all about the advantage of trading option with number of shares
in single agreement. A lot is bought for a reasonable price in options
and with a slight increase in the price of stock one is bound to get decent
returns out of a lot. Hedging
Another
important provision of stock options is Hedging. One can view it as a
guarantee. Stock options are helpful in guarding the investments in the
anticipation of a downfall. As per the trade analysts of stock options,
Hedge is essential in a situation where one is not sure about picking
the stock, and at the time one is advised to drop from investing. Large
institutions are very well benefited by hedging action. Gains are achieved
by individual investor by applying the strategy of Hedging. The metal
stocks and their gain of momentum, even minimum rate below the traded
rate can be set for a minimal loss by using options even in the case if
downward momentum is bound to operate while reaping the benefits of upward
momentum in an efficient way. Most of the
corporate companies use stock options to lure skilled staff in
order to have their continuous and long term services in an efficient
way. The options exercised by the companies have the similarities to that
of regular stock options. The staff of the company is not having any kind
of obligation but he is given the right for purchasing the company stock.
When a contract takes place, this is between the company and the employee.
In the case of normal option contract takes place between two people and
in no way company is responsible for the contract. The class
of exchange traded derivatives is known as traded
option. There are standardized contracts, quick systematic pricing,
and are settled through a clearing house that is fulfillment is ensured
for other classes of exchange traded derivatives. Stock options,
commodity options, bond options, interest rate options, index or equity
options, currency cross rate options, and Swaption are included under
Trade options. To
understand about the working nature of options, an illustration is provided.
If the price
of the stock is $.130, less than $.10 to the set stock price, currently
the option is of no value. The amount of $.10500 is paid totally in this
contract and actually down by the same amount. After a period of time
the value of the stock increases to $.150. It is clearly seen that the
value of asset along with the options contract considerably has gained.
The current value of the stock is 20 * 1500 =$.30000. The profit is obtained
by the difference of amount increased and amount paid for the contract
is 19500. Selling can be made at this profitable rate. The price drops
to $.128 when the contract period has ended. This value is below the strike
price set. The worth
of the option is of no value. Now the amount has come to initial payment
during the entry in to this contract. The process undertaken by using
the options is known as leverage. According to the description given above,
the basics have been clearly stated for our clear understanding in options.
Also we notice in the trading that most of the investors prefer to take
decent products and exit from the current options trading after booking
the profits. The data and statistics available from the trading are enumerated
as given. Totally
15% of the options are traded, 40% exit out of the trading, and 45% of
the contracts end with out any value. The variations that had taken place
during the options trading are also explained by the parameters like intrinsic
value, time value and premium. The
sum of intrinsic value and the time value is known as premium. Premium
= 18 + 2 = 20. Intrinsic
value -> Price of the stock = Strike Price. Time
value is the increasing value of the option. Trading done actually is
always above the intrinsic value.
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