The option is defined as a contract between seller and buyer in which a seller, who is called option writer, offers a buyer the right without any obligation. The option writer gives the right to the option buyer without any obligation to buy (call option) or sell (put option) an underlying asset at an agreed-upon price within a set time period. The underlying asset in question, however, on which the option is based, is the equity shares in a publicly-traded company. The agreed-upon price in the contract is called the strike price. The set of the time period in the contract has a termination date which is called the expiration date of the option before which that particular option can be exercised. And the exercise is meant for utilizing the right as included in the contract to buy or sell the underlying asset.
Options trading are a vehicle that allows investors managing the risk far better than any other instrument. But, unfortunately, investors often move with wrong perceptions and seek tricks, strategies based on rumors, and gimmicks. Despite playing gambling let’s see how the options trading can be done wisely.
Options Trading Success Ideas
The most important thing that a newbie option trader knows that an option owner has the right, but not the obligation, to exercise that particular option. So to perform the best option trades an options trader should exercise the following options trade ideas for successful option exercising decision:
Don’t Exercise — As an option owner you have the right to exercise, but, it is rarely a good decision to exercise. It is easier and less expensive if you sell the option rather exercising it. Although specific situations are there in which exercising an option is worthwhile, still as a newcomer in the options market, you should keep patience and learn about the exceptions.
Choice of Obligation is yours — ‘But not the obligation’, is the phrase in the option is the most critical or decisive factor in the success or failure of the options trading. Unfortunately, this crucial variable factor is often ignored. Therefore, exercising options trade ideas without understanding it properly when to exercise an option, success or failure lies in your luck. Exercising an option is not a must, it is your choice. You may sell it or allow the option to expire worthlessly or you can exercise.
Selling an Option, Losing the Rights — When you sell an option, you lose your right, and instead, you make an obligation. On expiry of the option without any action, your obligation also expires automatically and treated as canceled. If you assign an exercise notice, which indicates the option owner has exercised the option. Then you can do nothing but are obliged to fulfill the condition of the option contract. Only thing what you can do is to purchase an identical option that you sold earlier. And that too has to be done before you assign an exercise notice. That purchase of an identical option before execution of assignment notice cancels your obligation.