26 lines
1.9 KiB
Plaintext
26 lines
1.9 KiB
Plaintext
CHAPTER 1
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Definitions
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The successful implementation of various investment strategies necessitates a sound
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working knowledge of the fundamentals of options and option trading. The option
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strategist must be familiar with a wide range of the basic aspects of stock options
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how the price of an option behaves under certain conditions or how the markets
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function. A thorough understanding of the rudiments and of the strategies helps the
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investor who is not familiar with options to decide not only whether a strategy seems
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desirable, but also - and more important - whether it is suitable. Determining suit
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ability is nothing new to stock market investors, for stocks themselves are not suitable
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for every investor. For example, if the investor's primary objectives are income and
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safety of principal, then bonds, rather than stocks, would be more suitable. The need
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to assess the suitability of options is especially important: Option buyers can lose their
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entire investment in a short time, and uncovered option writers may be subjected to
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large financial risks. Despite follow-up methods designed to limit risk, the individual
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investor must decide whether option trading is suitable for his or her financial situa
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tion and investment objective.
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ELEMENTARY DEFINITIONS
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A stock option is the right to buy or sell a particular stock at a certain price for a lim
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ited period of time. The stock in question is called the underlying security. A call
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option gives the owner ( or holder) the right to buy the underlying security, while a
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put option gives the holder the right to sell the underlying security. The price at
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which the stock may be bought or sold is the exercise price, also called the striking
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price. (In the listed options market, "exercise price" and "striking price" are synony
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mous.) A stock option affords this right to buy or sell for only a limited period of time;
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