Option trading involves investors and speculators buying and selling stock options before they expire. Stock options can be used for speculation, hedging or investing. Pricing relationships must be maintained and the stock options move with the underlying asset. The buyer of an option can exercise their right to buy a stock (call) or sell a stock (put) before expiration. However, options normally carry a premium and it is more efficient for the trader to sell the call or put in the open market. The seller of an option can close the option trade by buying the option back before expiration. Most premium sellers focus on front month options and they take advantage of accelerated time premium decay. Some option traders simultaneously buy and sell options with different strike prices and expiration months. They are able to create a variety of spreads and they can custom fit the opportunity with an option strategy. There are five option exchanges and they provide a competitive bid/ask for the options. A stock option that trades on more than one exchange is considered multi-listed. Stock options are uniform, and they are centrally cleared by the Options Clearing Corporation (OCC). This enables you to buy an option on one exchange and sell it on another. Look for the most competitive market when option trading.
November 4, 20082 min read