If you are holding a call option, and you can sell it for more than you paid to buy, you might close to realize a profit. You might also close to limit a potential loss if the option seems destined to remain out-of-the-money.
If you open a position by selling a contract, you might decide to close that position if you think that the option will be exercised, since you could then be required to make good on the obligation to buy or sell. In this case, since you sold to open, you’d buy to close.
Executing options trade
When you make an options trade, you go through a brokerage firm, just as you do when you trade stocks. Whether you give the order over the phone or online, you’ll have to provide detailed information about the option you’re trading, including:
- The name or symbol of the option
- Whether you are opening or closing a position
- Whether you are buying or selling
- Whether you want a put or call
- Strike price
- The expiration month
- Whether you are paying cash or using a margin account
- Whether you want a limit order or market price
You’ll have a chance to review your order and it’s crucial that you double-check all the details. Once you’ve agreed to the trade, you’ll receive confirmation that your order has been placed, which means it has been added to the line of orders waiting to be filled. Every time you make a trade, you’ll also pay a commission. The amount varies depending on the brokerage firm, but it’s important to consider the costs of trading when planning your options strategies.
What are fungible options?
Each exchange decides on the options it’s going to list, or make available for trading. The most widely traded options may be listed on all the exchanges, while others might be listed on only a few, or just one. There are some basic standards that all the exchanges adhere to in selecting the companies on which they’ll list equity options. Usually, eligibility for listing requires a minimum number of outstanding shares and a minimum market price for the stock.
If a company on which options are listed fails to maintain the minimum requirements, an exchange may decide to drop the listing.
All listed options are fungible, which means the contract terms are identical from exchange to exchange. That allows you to buy an option on one exchange and sell it on another to take advantage of the best available price. In most cases, though, your brokerage firm determines where the transaction will take place.
How options are regulated?
Listed options are traded on self-regulating exchanges (SROs) that are in turn, regulated by the Securities and Exchange Commission (SEC) – the federal agency that governs the securities industry. For example, the SEC approves the standards that exchanges must use to list options, though each exchange can make its own selections for listing.
Getting approved for options trading
Even if you have an account with a brokerage firm and you’re actively trading stocks, you’ll need to be approved before you can trade options. The rules are meant to prevent you from making options trades that might be beyond your ability to cover or that might expose you to an inappropriate level of risk. The brokerage firm will ask you for information about your investing experience and assets, and will require you to read a document about the risks of options trading. You may also be asked about your knowledge of options strategies. Based on your answers, the firm will approve you for a specific level of trading, which determines the strategies you may use.
Different transactions also have different margin requirements. Those that expose you to greater risk require a higher margin.
Options Trading For Beginners [Full Guide] by Inna Rosputnia
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