As a beginner in the world of trading, it can be overwhelming to navigate the various jargons associated with the stock market. One such term that you might come across is « option contract for 100 shares. » So, what does this mean, and how does it work?
An option contract is a financial instrument that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price before a predetermined expiration date. In the stock market, the underlying asset is typically a stock or an exchange-traded fund (ETF).
Now, when we say « option contract for 100 shares, » it means that one option contract controls 100 shares of the underlying asset. For example, if you buy one option contract for a company`s stock, you would have the right to buy or sell 100 shares of that stock.
The reason why option contracts are often based on 100 shares is due to historical reasons. Back in the days when options were first traded, stock prices were typically quoted in fractions, and a standard lot size for trading was 100 shares.
So, why would someone want to buy an option contract for 100 shares instead of buying or selling the underlying asset directly? Well, options offer several advantages over traditional stock trading. For one, options allow traders to profit from both rising and falling markets. If you think a stock will go up, you can buy a call option. If you think it will go down, you can buy a put option.
Another advantage of options is leverage. Options require less upfront capital than buying or selling the underlying asset directly. This makes it easier for traders to enter and exit positions and manage risk.
However, it`s important to note that options trading can be complex and carries significant risks. Before diving into options trading, it`s important to educate yourself on the different strategies and risks involved. It`s also crucial to have a solid trading plan and risk management strategy in place.
In conclusion, an option contract for 100 shares means that one contract controls 100 shares of the underlying asset. Options trading offers several advantages over traditional stock trading, but it`s important to understand the risks and have a solid trading plan in place.