Online Stock Option Trading

A stock option is an agreement between a buyer and a seller that gives the purchaser the right to buy or sell an asset, but there is no obligation to do so. However, this transaction must happen on or before the option's expiration time at an agreed price called the strike price. In exchange for granting the option, the seller gets a payment - otherwise known as the premium - from the buyer. A "call option" gives the purchaser the ability to buy the asset and a "put option" gives the buyer of the option the right to sell it. If the purchaser decides to take advantage of this right, the seller is required to sell or buy the asset at the agreed-upon price. However, the buyer can decide not to exercise the right and let it expire. The asset can be a piece of property, a security - such as a stock or bond - or a derivative instrument, such as a futures contract.

The supposed value of an option is calculated according to several models. Developed by analysts, these models try to predict how the value of an option will change in response to shifting conditions. Therefore, the risks related to granting, owning, or trading options are quantified and managed with a greater degree of precision, than with a lot of other investments, or so some believe. Exchange-traded options are an important category of options. They have standardized features and are traded on public exchanges, which facilitates trading between independent parties. "Over-the-counter" options are traded among private parties and are frequently well-capitalized companies that have prearranged trading and clearing arrangements with each other.

"Another important class of options, particularly in the U.S., are employee stock options, which are awarded by a company to their employees as a form of incentive compensation," says Wikipedia. "Other types of options exist in many financial contracts, for example real estate options are often used to assemble large parcels of land, and prepayment options are usually included in mortgage loans. However, many of the valuation and risk management principles apply across all financial options."

The most common way to trade options is using standardized options contracts that are listed by various futures and options exchanges, many of which are listed and available for trading online.

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