Sunday, November 25, 2012

The Genealogy of an Option

Starting from scratch, we are assuming that you are interested in diversifying the base of your monthly income. One way to do this is to trade (that means buy and sell) financial instruments. In short, these are contracts (legal agreements) that compel one party to either pay or promise to pay money or something else of value in exchange for some benefit, like interest, indemnification against risk, acquisition of rights etc.

Although they are contracts, which can be written on paper just like any other contract, financial instruments can be treated as ordinary goods, with intrinsic value. That is why they can be bought and sold (hopefully) for a profit.

Typically, contracts have terms. As a principle, one needs to carefully study the terms of a contract in order to know what they agree to. But, for a voluminous contract, this can be tedious and time consuming. Therefore, some of these contracts are standardized and, therefore, conform to standard terms and conditions.

Standard financial instruments are called securities. The name implies the fact that they are simpler, faster, cheaper and safer to trade than non-standard ones. Due to standardization, securities can also be stored electronically.

Securities can be primitive (like stocks and bonds) and derivative (like options, swaps, forward contracts etc.). Trading each of these financial instruments requires a particular set of skills. If you choose to learn options, you will be tapping into advanced financial instruments trading. In short, an option is the right to trade an underlying asset at a price frozen in the past and making a profit from the difference to the present price.

Your monthly income can involve plenty of money off of options investing if you take the time to learn options and see how they can work. You can visit the Born to Sell website for additional details.

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