For learning how to trade options, first you need to know basics of options trading.In finance an option is an contract between a buyer and the seller that gives the buyer the right to buy or sell a particular asset on or before the options expiration time at an agreed price In return for granting the option the seller collects the payment from the buyer. A call option gives the buyer the right to buy the underlined asset and the put option gives the buyer the right to sell the underlined asset. Once the call option has been received by the buyer the underlined asset can be sold to the seller at a pre agreed price if the seller chooses to use his right.
The buyer may choose not to exercise the right and let it expire take the asset which underlined asset can be a piece of property a security or derivative instrument such as futures contracts.
The value of option is evaluated according to several models. Qualitative analysis has helped in the development of the model which can evaluate the value of an option under changing circumstances. Risk of association with granting or trading options can be quantified and managed with a great degree of accuracy.Exchange trade options form an important part of options those that have standardised contract feature trade on public exchanges and facilitate trade among the independent parties. When the trade happens over the counter and traded between the private parties well capitalised institutions would have negotiated separate trading and clearing arrangement with each other.
The option which is highly practised in the US is called employees stock option. This option is given to the employees as an incentive towards the hard work done in the organisation. Financial contracts withhold many options like the real estate option which is used top assemble large parcels of land prepayment option which are used in mortgage loans.
The two parties agree the terms and conditions on the term sheet and each financial option is considered as an option. It says
1. The option holder’s option would be stated if he has the right to buy call option or sell put option.
2. It would state the assets quality and class of the underlined asset.
3. Transaction would occur at a certain price which will be mentioned.
4. The expiration date or the last date on which the options can be exercise.
As all securities trading option entails risk of the option value changing over time. Unlike traditional securities the return from holding varies none linearly with the value of the underlying factors return from holding varies