Option Trading Termologies

Dr Watson Goh By Dr Watson Goh, 15th May 2011 | Follow this author | RSS Feed
Posted in Wikinut>Money>Investing

Learn and understand option trading termologies. Read On..................

Frequently Asked Questions?

What is Margin?

Margin basically doubles your trading dollars with stocks and index funds. A 5% gain turns into a 10% gain if you use some of that extra trading money. If you have a bad trading system, you will lose money twice as fast. If you have a good system, you will make money twice as quick.

Most brokerages need $2000 to initially start up a margin account. New margin rules: The SEC mandates that if you are a "pattern day trader", you must have $25,000 in your account. The definition of a pattern day trader is not very specific, so you might want to talk to your broker about this.

If you have $25,000 in your margin account, you can have up to 10-1 margin use. Using 10-1 margin is not suggested due to the higher risk.

What is a Call ?

A call option is basically the right to buy a number of shares of stock at a given strike price. Most people, including us, never exercise our right to actually buy the stock. We just trade the options before they expire. When you buy a call, you are betting that the stock will go up, and thus the option will also rise in price. Then you sell the call. To ensure that there is a buyer out there, we make sure that the OI is at least 300.

What is a Put ?

A put option basically is just the opposite of a call. With a put, you are betting that the underlying stock will go down. A put increases in value when the stock or index goes down. That's one of the ways you can profit in a bear market or during a correction.

What is a Strike Price ?

The price at which a stock can be bought if the option is exercised. For example, you buy 5 of the XYZ $35 calls. XYZ is trading at $34, and the option is at 2. If the stock hits say $40, you have the right but not the obligation to buy 500 shares of XYZ stock at the strike price of $35. Of course, we never do this. We just trade the options themselves.

How much money should I start with ?

In order for you to make money at this game, you have to pay a small portion of your winnings in broker fees. We recommend at least $1000 per position. Anything less, and you'll end up paying your broker more than you make. Since we recommend spreading money equally between 5-10 different positions, the minimum suggested account size is $10,000.

Can I receive a discount for prepaying 6 or 12 months ?

Yes, you will receive 15% off if you prepay 6 months, and 20% off if you prepay 12 months. To receive the discounted price, simply log into the Member page, click on Edit Billing, and set the Payment Cycle to 6 or 12 months. The fees are refundable, minus a one month minimum.

How do I cancel service ?

Our web site is automated, so you can simply log into the Member page, click on Edit Billing, then set the auto-renew feature to "no". You will then be cancelled automatically at the end of your billing cycle, and you will also receive a receipt of your cancellation via email. No phone cancellations please.

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author avatar Funom Makama
18th Oct 2011 (#)

Insightful, deep, nice and just what we need to read in such a community. My sense of values sometimes comes from such articles. Keep it up!

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