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A Full Guide to Options Trading

A Full Guide to Options Trading

Options Trading Defined:
Options are forms of derivative financial instruments that establish a contract between two parties who are concerned with the buying or selling of an asset at a distinguished reference price. The buyer of an option gains the right, but not the direct obligation, to engage in a specific transaction on the asset, while the seller will incur the obligation to fulfill the transaction if it is requested by the buyer. 
The price of an option contract is derived from the difference between the reference price and the value of the underlying asset—typically options are attached to the buying and selling of stocks, bonds, futures contracts and currencies. In addition to the price of the underlying asset, option contracts are also attached with a premium based on the time left until the contract expires.
 
An option contract conveys the right to purchase something referred to as a call and the right to sell something known as a put. The reference price at which the underlying asset may be traded is referred to as the strike price or the exercise price. The process of activating an option and trading the underlying asset at the agreed-upon price is referred to as exercising.
The majority of options possess expiration dates; if the option is not exercised by the expiration date, it becomes worthless and is rules void.
The majority of options are created in standardized forms and traded on options exchanges among the general public, while other options are customized to the desires of the buyers based on an ad hoc basis—typically these options are delivered to an investment bank through an over-the-counter process.
Contract Specifics of Options


Every option contrast is an agreement made between two counterparties with the terms of the option specified in a term sheet. Option contracts may be complicated; however, the agreements laden in the contract typically contain the following stipulations and specifications:
Whether the holder of the option has the right to exercise a call option or the right to sell (a put option).
The quantity and class of the underlying asset. For example, the term sheet will specify the name of the company and the quantity of the shares.
The strike price, which is the specific price at which the transaction will be finalized and occur upon exercise.
The expiration date, which is the last date the option, can be exercised.
The settlement terms of the agreement, for example whether the writer must deliver the asset on exercise or if a tender equivalent to the cash amount is permissible.
The terms by which the option may be quoted in the market to convert the quoted price into the actual premium, meaning the total amount paid by the holder to the writer of the option agreement. 

Put Option Explained In Depth

Put Option Explained In Depth

What is a Put Option?
A put option is a contract agreed upon between two parties; the writer of the contract (referred to as the seller) and the buyer of the option agreement. In a put agreement, the buyer acquires a short position of the underlying asset by purchasing the right to sell the underlying instrument to the seller of the option at a specific price, known as the strike amount. 
If the buyer of the option exercises their right, the seller is then obligated to purchase the underlying instrument from the buyer at the agreed-upon strike price, regardless of the current market price. In exchange for possessing this option, the buyer then pays the seller or writer of the option a fee, referred to as the option premium.
By providing a guaranteed buyer and price for the underlying asset, put options offer insurance against severe risk and excessive loss. 
Sellers of put options will profit by selling options that are not exercised. This is the case when the ongoing market value of the underlying instruments makes the option unnecessary, meaning the market value of the instrument remains above the strike amount during the option contract period. 
A purchaser of a put option may also profit through the ability to sell the underlying asset at an inflated price relative to the current asking price of the asset; as a result of this relationship the owner of the put option may repurchase their position in the equity at the reduced current market price.
Examples of a Put Option

A buyer who purchases a put believes that the price of the underlying stock will decrease in value. The individual pays a premium which will never be recouped unless the put option is sold before the contract expires. The buyer has the right to sell the stock at the exercise or strike price. 
The writer of the put option receives the premium from the buyer. If the buyer exercises the option, the writer will repurchase the stock at the strike price. If the buyer does not exercise the option, the writer’s profit is the premium.
Trader Z purchases a put option to sell 100 shares of ABC Corp. to Trader Y for $50 per share. The current price of ABC Corp. is $55 per share and Trader A pays a premium of $5 per share. If the price of ABC Corp. falls to $40 a share before expiration, then Trader Z can exercise the put by purchasing 100 shares for $4,000 from the market then selling them to Trader Y for $5,000.
If the share price never drops below the strike price of $50, then Trader Z would not exercise the option. Trader Z’s option therefore would be worthless and the individual would lose the investment, which is the premium to purchase the option contract. Trader Z’s total loss is limited to the cost of the put premium plus the sales commission required to purchase it.z

All The Facts on Stock Derivatives

All The Facts on Stock Derivatives

What are Stock Derivatives?

A stock derivative is a financial instrument that contains a value based on the expected future movement and prices of the asset to which it represents or is linked to. The assets in a stock derivative are stocks; however, a derivative in general can take the form of any financial instrument included currencies, commodities, and bonds.
Derivatives, because of their complexity and uniqueness, are referred to as “alternative investments.”
 A derivative, on its own, possesses no value; however, the more basic types of derivatives are traded on markets before their expiration date as if they were generic assets.
Derivatives are categorized by the following relationships and characteristics:

1. The relationship between the underlying equity or asset and the derivative itself, meaning the nature of the contract i.e. swaps options or forwards.
2. The type of underlying asset that is being exchanged (i.e. foreign exchange derivatives, interest rate derivatives, commodities, credit derivatives, or equity derivatives.
3. The market in which the derivative is exchanged and transacted (i.e., over-the-counter derivatives or exchange-traded derivatives.
4. The pay-off profile attached to the derivative.
5. The characteristics attached to the derivative, meaning is the derivatives vanilla or exotic in nature?
Derivatives may be used for a variety of reasons; however, investors will commonly take part in these forms of transactions for the following reasons:

1. Derivatives provide leverage so that a small movement in the underlying value of the asset can create a large difference in the value of the derivative contract.
2. Derivatives enable investors to speculate and generate a profit from the transaction if the value of the underlying financial instrument moves the way that they expect. For example, investors commonly purchase or take part in a derivative agreement based on a notion that a stock moves or stays in or out of a specific price range.
3. Derivatives are commonly used to mitigate or hedge risks of an underlying asset. By purchasing or entertaining a derivative contract an individual can obtain both side of a value move, meaning they can play the opposite direction to their previously position to cancel some or all of their exposure to a given financial investment.
4. A derivative will also help obtain exposure to the underlying financial asset where it is not possible, in normal circumstances to obtain such a right. For example, investors can partake in weather derivatives.
5. A derivative contract also offers the ability for the investor, where the value of the derivative contract is linked to a specific condition or event. 

Dividend Paying Stocks

Dividend Paying Stocks

What is a Dividend?
A dividend is a payment made by a corporation to its shareholders. It is delivered in proportion to the underlying entity’s profits and paid directly to shareholders of the corporation. When a corporation earns a profit, the funds can be used in two ways: they can be re-invested into the corporation’s business model or they can be distributed to shareholders. In turn, there are two primary ways to distribute funds to shareholders: dividends or repurchases. 
A cash dividend is the most common payment method undertaken by corporations who secure profits. Cash dividends are paid out to shareholders via an electronic transfer or as a printer check. Cash dividends are a common form of investment income and are taxable to the recipient in the year they are dispersed. For each share held, a declared amount is delivered to the holder. As a result, if an individual owns 100 shares of a company and the attached cash dividend is $.40 cents per share, the stockholder will be paid $40 per quarter or whenever the company issues its dividend. 
All dividends offered by a company must be approved by the entity’s Board of Directors. For a public corporation, there are five primary dates attached to the delivery of a dividend:
Declaration Date: This date refers to the day the Board of Directors formally announces its intention to provide holders with a dividend payment. 
In-Dividend Date: Refers to the last day—trading day before the ex-dividend date—where the stock’s dividend is affirmed. Holders of the stock and any party who purchases stock on this day are permitted to receive the dividend. Holders who sell the stock will lose the right to the dividend on or after this day. 
Ex-Dividend Date: Refers to the day where all shares bought and sold are no longer attached with the right to declare a dividend payment. 
Record Date: Any shareholder who is registered in the stockholders of record on or before this date is eligible to receive the dividend.  
Payment Date: Refers to the day when the actual dividend payment is mailed or received by the shareholders
List of Dividend Paying Stocks:
Using the definition above, dividend paying stocks are those companies who provide shareholders with a dividend payment. Dividend paying stocks will implement their own terms in regards to yield, policy, announcements and the date of delivery for the attached payment. 
Dividend paying stocks refer to companies who will pay a portion of their earnings back to shareholders in the form of a dividend. Dividend paying stocks are located in all sectors, including Utilities, Chemical, Financial, Retail and Energy. 
The following list represents the best dividend paying stocks as of November 2011:
CQP: 18.2%
CMO: 15.2%
CODI: 13%
CLMT: 12.3%
PTNR: 11.92%
ALSK: 10.2%
DPM: 10%
ARCC: 9.75%
AINN: 9.05%
CSE: 9%
LFL: 8.35%
RGC: 5.29%
AKR: 4.40%
BAC: 4.40%
ABT: 3.50%
MMM: 2.70%

Understand Stock Quotes With These Facts

Understand Stock Quotes With These Facts

What are Stock Quotes?
A stock quote is simply a list of a stock’s price, as well as the characteristics that elucidate upon the fundamentals of the underlying entity.
In all stock markets, a tradable company’s stock quote is published in a number of forums; the Internet, newspapers and various media outlets will list stock quotes. The arrangement of stock quotes is compiled in a comprehensive list known as a stock table. Investors will evaluate stock tables to track the prices of stocks to determine whether an investment is worthwhile.
Ever stock table will contain different data about the listed company’s stock prices and fundamentals. In a generic sense, a stock table will contain the following information for the underlying equity: the high and low bids for the stock during intraday trading, the high and low prices for the stock during intraday trading, the closing price for the stock, and any significant data changes in the price of the stock.
The fundamental aspect of a stock quote is the price of the underlying stock. In an exchange, the prevailing price of a stock is referred to as its “trading price.” When investors come together to buy and sell stock, the transaction is referred to as a trade. 
As a result, the trading price of a stock is determined either through an electronic evaluation or by a floor manager’s interpretation of the compiled asks and bids for the stock. This information determines the demand for the stock (how many buyers in the market are willing to purchase the stock and how available is it to potential investors)
Through the advancements of computer technology, stock quotes are readily available online and are updated in real time.
In a generic stock quote, the closing asking and bidding prices will be listed. The asking price is a collection of all the offers made for the sale price of the stock. An ask is essentially the price at which the holder or broker of the stock would like to offer the stock for sale, in addition to the commission taken by the dealer for the execution of the sale. Typically, the amount of stock for sale is also defined by the owner and computed into the asking price. 
In a generic stock quote, the bid is the selling price of the stock, or the price that an investor is willing to pay to assume ownership of the underlying securities. The “best bid” attached to the stock represents the best offered price for ownership of the underlying security. When compiled in a stock table, bids may also be labeled as “sells.”
The difference between the asking and bidding price of a stock is referred to as the “spread.” The spread defines the difference between the price at which sellers wish to sell the stock and the price at which buyers wish to purchase the stock. The spread will also denote the broker or holder’s profit margins on transactions for each stock.

Read This and Be an Expert on Stock Trading

Read This and Be an Expert on Stock Trading

What is a Stock Trader?
A stock trader can take the form of an individual investor or a firm who participates in the buying and selling of stocks, bonds, or financial instruments as part of the global financial markets.
Individuals or business entities that trade stocks or bonds within the stock market do so in hopes of accruing a profit from short-term price volatility or fluctuations in the positions held or transacted. A stock trader may hold their positions for several weeks or several seconds, depending on their strategy, their forecasts for the underlying position, and the overall volatility of the stock market. 
The majority of stock traders are considered financial professionals; however, anyone with liquid capital can partake in stock trading. Those stock traders, who have clients, act as money managers or advisers; businesses or individuals will offer funds for the exchange of a professional’s stock tips and the incorporation of their strategy to earn a profit. In these instances, the financial manager can take the form of an independent professional or a massive bank corporation. 
The latter may include financial managers dealing with hedge funds, mutual funds, pension funds, investment funds or other professionals involved with fund management, equity investment, and broader wealth management. In addition to the different forms a professional can represent, there are numerous strategies that can be incorporated into stock trading. Day trading, market making, scalping, momentum trading, trading the news, arbitrage, derivatives trading, hedging, trend following, and trading off fundamentals are all common forms of stock trading techniques. 
As stated before, a trader can hold a position for an undetermined amount of time; however, entities or individuals who purchase stocks with the intention of holding them for an extended period of time (several months to years) will primarily rely on fundamental analysis for the investment decisions. This method, assumes that the stock-holder is not playing the fluctuations of the market and is solely intended to profit off the fundamentals and the progress of the underlying stock purchase. This strategy was made popular in the bull markets of the 80s and 90s where buy-and-hold investors withstood the short-term dips in the stock market. 
Trading activities possess a considerable level of complexity, risk, and uncertainty. Additionally, the incorporation of a professional stock trader will also require the payment of transaction fees, taxes, and commissions. 
Depending on the nature the corresponding state legislation involved, a number of fiscal obligations must be respected for those involved in stock trading. For instance, taxes are levied differently depending on jurisdiction over transactions which involve capital gains and the obtainment of dividends. 
In addition to taxation, a stock trader must acknowledge the significant opportunity costs that are incorporated into stock trading. The time needed to access information, the financial risks attached to owning stock, the consumption of electricity needed for researching stock, and the time that goes into developing a strategy must be incorporated into a cost/benefit analysis before one decides to trade stocks.

Stock Market at a Glance

Stock Market at a Glance

What is the Stock Market?


A stock market, also referred to as an equity market, is a public entity or marketplace that is created to expedite the trading of company-issued stock and derivatives. 
Shares of stock and derivatives are exchanged between the buyers and sellers who make up a stock market. The shares and derivatives are exchanged between the parties at an agreed price. 
Shares of stock are simply certificates that signify a percentage ownership in a particular company. Those who invest in stocks do so in hopes of earning a profit through the underlying company’s business model. Shareholders possess voting rights, typically one vote per every share owned. Public companies (those who issue stock) hold yearly meetings where the shareholders come together to vote on company issues. Additionally, stockholders receive annual or quarterly reports to let shareholder know how the company is doing financially.
When a public corporation wishes to sell shares of its company, it will list its stock on an exchange or stock market. The most commonly used stock exchanges in the United States are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASDAQ). These exchanges or stock markets were established to make the transactions (buying and selling stock) easier for those parties involved.
Each developed nation possesses its own stock market. Although a number of foreign companies are listed on the NYSE and NASDAQ these international stock markets typically possess stocks which operate abroad. 
Participants in the stock market range from small private stock investors to large hedge fund traders. These parties will place an order with a brokerage firm or financial intermediary; once the order is accepted by the intermediary, a professional within the stock exchange will go into the stock market and execute the order.
Some stock markets are physical locations where stock transactions are carried out on a trading floor. The transaction is affirmed through a type of auction, where traders may enter verbal bids and offers simultaneously. The other type of stock market is a virtual marketplace, which is composed of a network of computers. Traders are executed electronically in a virtual marketplace. 
The NYSE is a physical exchange, where only those stocks listed on the NYSE can be traded. The purpose of all stock markets, whether tangible or virtual, is to facilitate the exchange of financial securities between buyers and sellers. This expedited process enables both buyers and sellers to observe real-time trading information on the listed securities. 
Laws that Regulate the Stock Market

All transactions made on a stock market are regulated and governed by the Securities Exchange Commission. Any fraudulent attempts of buying or selling financial instruments as well as the delivery of min-information with the direct intent to illegitimately accrue a profit will result in investigation and subsequent penalties if found guilty. The typical punishments attached to a fraudulent or illegal maneuver made within the stock market is a termination of the individual’s license, numerous fines and possible jail time.

Understanding the 2010 Stock Market Crash

Understanding the 2010 Stock Market Crash

Stock Market Crash of 2008 Explained:
The Stock Market Crash of 2008 was the product of numerous missteps taken by investors, government regulators and big banks. 
The primary variable that affected the stock market in 2008 was due to the collapse of the credit market. During the years preceding the collapse of the credit market, the sub-prime mortgage industry and CDO industry thrived—in essence big banks and investors were profiting off defaults and the debts of others. 
As a result of poor regulation of these industries, numerous banks and mortgage companies were left free to offer loans to individuals with bad credit and a lack of income. These loans were made available due to boom in housing prices; lenders could afford to issue bad loans so long as the homeowner’s equity in their newly-purchased house outpaced their inability to fulfill their debt obligation. 
Due to the swell in home prices, borrowers believed that an inability to fulfill a loan would simply result in foreclosure and the obtainment of a sure-fire asset. This brutal cycle precipitated a boom in home purchases; numerous Americans decided to over-extend themselves and purchase homes they couldn’t afford. This strategy, however, failed when housing prices started to plummet in the fall of 2007. When prices dropped, homeowners were left with debts that exceeded the value of their home, a cycle which invariably led to mass foreclosures and defaults.
By 2008, the Federal National Mortgage Associate and the Federal Home Loan Mortgage Corporation either owner or guaranteed $6 trillion in mortgage loans. The mortgage crisis penetrated numerous financial institutions which possessed significant stacks in mortgage-backed securities and CDO packages. As big banks like Bear Sterns and Merrily Lynch crumbled, an overwhelming of financial distress dominated the news. 
With the credit market dry, banks couldn’t profit from issuing loans. With numerous Americans facing insurmountable debt and an inability to afford a home, consumer spending dipped to decade lows. As a result of these awful occurrences, investor confidence severely waned in all forms of investment. 
The credit crisis eventually fueled a domino effect of negative impacts on a variety of macroeconomic factors such as unemployment rates, domestic production, GDP, and our government’s debt. With all of these financial problems swarming, investors backed out of the market or sustained massive losses to their investment and retirement accounts. 
The failure of an assortment of lenders, mortgage companies and big banks gave way to an overhaul of the regulatory practices instituted on the financial markets. During the credit crisis, lenders were awarding loans regardless of an individual’s credit history, income, or job status. As a result of this practice, hundreds of thousands of Americans extended themselves beyond their means, which eventually contributed to the collapse of the economic markets in 2008-2009.
On Monday October 6 of 2008, the stock market started a precipitous drop, which saw the Dow Jones Industrial Average plummet by 1874 point or 18.1%. 

Bombay Stock Exchange Overview

Bombay Stock Exchange OverviewWhat is the Bombay Stock Exchange?



The Bombay Stock Exchange is the oldest stock market in Asia and is located on Dalal Street in Mumbai, India. The total equity market capitalization of the companies listed on the Bombay Stock Exchange is $1.63 trillion American dollars, making it the 4th largest stock exchange in Asia and the 9th largest in the world. The Bombay Stock Exchange has the largest number of publicly traded companies in the world and is often cited as one of the best performing stock markets. 
As of January 2011, there are roughly 5,040 listed Indian companies that trade on the Bombay Stock Exchange. As a result of this figure, the market possesses a significant trading volume. 
The BSE SENSEX is the premiere index in India and Asia; similar to the Dow Jones Industrial Average the index is comprised of 30 component stocks which represent individual companies that hold a dominating market presence in various sectors.

Dissimilar to the New York Stock Exchange or NASDAQ, the Bombay Stock Exchange possesses a stringent time schedule that incorporates various sessions. 
The hours of operation for the Bombay Stock Exchange are listed below:

Beginning of the Day Trading Session: 8:00-9:00 Am locally

Pre-open Trading Session: 9:00-9:15 Am locally
Trading Session: 9:15-15:30 locally
Position Transfer Session: 15:30-15:50 locally
Closing Session: 15:50-16:05 locally

Option Exercise Session: 16:05-16:35 locally

Margin Session: 16:35-16:50

Query Session: 16:50-17:35

End of Day Session: 17:30-

The hours of operation for the Bombay Stock Exchange are relevant for all days of the week except Saturdays, with the exception of Sundays and holidays declared by the Exchange in advance.

The Bombay Stock Exchange can be first traced back to the early 1850s, when groups of stockbrokers would gather under trees in front of Mumbai’s town hall. As the number of brokers increased, the market became an official organization known as ‘The Native Share & Stock Brokers Association.”
In 1956, the Bombay Stock Exchange became the first stock market to be legally recognized by India’s National Government under the Securities Contracts Regulation Act. Following this formal classification, the Bombay Stock Exchange developed the SENSEX in 1986, to distribute a means to measure the markets overall growth and performance. 
Historically, the Bombay Stock Exchange was an open outcry auction trading floor, however, through advancements in computer technologies, the Bombay Stock Exchange transformed to an electronically trading system in 1995. 

Dow Jones Index

Dow Jones Index

What is the Dow Jones Index?
The Dow Jones Index is a bundle of stocks that incorporate the primary market share of specific sectors. The Dow Jones Industrial Average also referred to as the Dow 30 or Dow Jones, is a primary stock index and a fundamental indicator of the overall health of the broader stock market. 
Created by Charles Dow, former Wall Street Journal editor and co-founder of the Dow Jones, the Dow Jones Index is comprised of 30 large, publicly owned companies based in the United States. The name of the index stems from a series of components—the Industrial portion is primarily historic, and the average refers to price-weighted characterization of the stocks that comprise the index. 
The value of the Dow Jones Index does not constitute the actual average of the prices of its components stocks, but rather the total of the component prices divided by a variable, which fluctuates whenever one of the of the component stocks undergoes a stock split or issues a stock dividend. Through this formula, the Dow Jones Index offers investors a consistent and accurate valuation method for the component stocks and the broader market economy. 
The Dow Jones Index is regarded as a benchmark index, meaning it is used to determine the overall health of the stock market. Originally Charles Dow created the index to gauge the performance of the industrial sector, however, as innovation and new sectors have infiltrated the market, the index’s performance is now influenced by an assortment of factors, such as domestic and foreign political events as well as by natural disasters. 
Components of the Dow Index trade on both the New York Stock Exchange and the NASDAQ, while the derivatives of the DOW trade on the Chicago Board Options Exchange and through the CME Group, the leading futures exchange company, which currently owns 90% of the Dow Jones index, including the Dow Jones Industrial Average. 
The Dow Jones Industrial Average:

The Dow Jones Industrial Average currently contains the following 30 US stocks:
3M, Alcoa, American Express AT&T, Bank of America, Boeing, Caterpillar, Chevron, Cisco, Coca-Cola, DuPont, ExxonMobil, General Electric, Hewlett-Packard, The Home Depot, Intel, IBM, Johnson & Johnson, JPMorgan Chase, Kraft Foods, McDonald’s, Merck, Microsoft, Pfizer, Procter & Gamble, Travelers, United Technologies Corporation, Verizon, Wal-Mart, and Walt Disney.
To accurately gauge the markets the DJIA will incorporate an assortment of market leaders into its index. As a result, the components of the DJIA have changed 48 times in its 114 year history. When corporations are replaced, the scale used to calculate the index is adjusted so that the overall value of the average remains the same.