Bungee Options Trading – What You Need To Know
Trading in bungee options is one of the best choices an investor can make given the high expectancy of gain involved. It is therefore imperative to learn the language and have the know-how of this trade.
Generally there are two categories of options. The first one is a call which enables the buyer of the option to have the right to buy a particular asset within a certain period of time. A call is synonymous to the long position when dealing with stocks. Here an investor buys a call with the hope that before the option expires, the stock will have increased substantially. The second category of option is a put which confers on the holder the right to sell an asset in a particular period of time at a certain price. This is similar when dealing in stocks to having a short position such that the buyer of the put hopes that there will be a fall in the stock price before the option expires.
Those participating in options market will therefore be one of four categories: buyers of calls, buyers of puts, sellers of calls or sellers of puts. Those participating as buyers of options whether calls or puts are collectively termed holders while the sellers are called writers. Holders are said to have long positions whereas sellers or writers are said to have short positions .In other words holders are under no obligation to buy or sell and thus can choose to exercise their right. On the other hand writers are under obligation to buy or sell and therefore are required to honor their promise to buy or sell.
An underlying stock can be sold or purchased before the expiry date at a price referred to as the strike price. In order to exploit a profit, the price of a stock must be exceed the strike price for call options and the price of the stock must go below the strike price for put options. For call options if the share price goes above the strike price, the option is said to be `in the money’ .The same is said of put options if the share price goes below the strike price. The amount by which a share is in the money is referred to as the intrinsic value.
The total cost of an option is determined by analyzing factors such as the strike price, the time value or time remaining to expiration, the stock price and volatility among others. This total cost is therefore the price of the option and in options trade is referred to as the premium.
Depending on the country, there exists national options exchange and any options traded in such an exchange are called listed options. Listed options have fixed expiration dates and strike prices. Also each listed option represents a contract (100 shares of a company). Notably, the national options exchange comes in as a third party but there are other options that can be between a company and its employees without any third party. These are called employee stock options.
Armed with this information, an investor can safely venture into trading in bungee options although it is highly recommended that one takes absolute care and conducts thorough research especially because this field of investments is considered the playground of experienced investors.
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