http://www.options-trading-education.com/7093/trading-compound-options/ Trading Compound Options An options trading style similar to the Russian dolls that nest inside one another is trading compound options. Trading compound options is trading an option on an option. In trading compound options there are two exercise dates. As with trading European style stock options the first contract is only exercised at maturity. In the case of a call contract the buyer will exercise the option if the price of the underlying equity has gone up sufficiently above the strike price of the contract. If the price of the equity is not high enough at maturity the contract is still exercised but in such a way as to give the buyer a second chance in trading compound options. The prices in trading compound options reflect the second chance aspect of having two back to back chances for a profit. Calls and Puts in Trading Compound Options In trading this trading style one still follows profitable options strategies by analyzing both fundamentals and technical factors. A call in either the first or following option gives the buyer the right to exercise the options contract and purchase the underlying equity no matter how high the price might go up. A put gives the buyer the right to sell the underlying equity no matter how low the market price might fall. In each case the buyer is under no obligation to execute the contract and will do so only if it is profitable. The difference in trading compound options is the second chance aspect of the second contract. If in a call contract the price does not rise sufficiently the options contract is exercised and a second contract takes its place. The same happens with a put contract. Contract Duration and Time Value

1. Trading Compound Options
By www.options-trading-education.com

2. An options trading style
similar to the Russian dolls
that nest inside one another is
trading compound options.
http://www.options-trading-education.com/7093/trading-compound-options/

3. Trading compound options is
trading an option on an
option.
http://www.options-trading-education.com/7093/trading-compound-options/

4. In trading compound options
there are two exercise dates.
http://www.options-trading-education.com/7093/trading-compound-options/

5. As with trading European style
stock options the first contract
is only exercised at maturity.
http://www.options-trading-education.com/7093/trading-compound-options/

6. In the case of a call contract
the buyer will exercise the
option if the price of the
http://www.options-trading-education.com/7093/trading-compound-options/

7. underlying equity has gone up
sufficiently above the strike
price of the contract.
http://www.options-trading-education.com/7093/trading-compound-options/

8. If the price of the equity is not
high enough at maturity the
contract is still exercised but in
http://www.options-trading-education.com/7093/trading-compound-options/

9. such a way as to give the
buyer a second chance in
trading compound options.
http://www.options-trading-education.com/7093/trading-compound-options/

10. The prices in trading
compound options reflect the
second chance aspect of
having two back to back
chances for a profit.
http://www.options-trading-education.com/7093/trading-compound-options/

11. Calls and Puts in Trading
Compound Options
http://www.options-trading-education.com/7093/trading-compound-options/

12. In trading this trading style
one still follows profitable
options strategies by analyzing
both fundamentals and
technical factors.
http://www.options-trading-education.com/7093/trading-compound-options/

13. A call in either the first or
following option gives the
buyer the right to exercise the
http://www.options-trading-education.com/7093/trading-compound-options/

14. options contract and purchase
the underlying equity no
matter how high the price
might go up.
http://www.options-trading-education.com/7093/trading-compound-options/

15. A put gives the buyer the right
to sell the underlying equity
no matter how low the market
price might fall.
http://www.options-trading-education.com/7093/trading-compound-options/

16. In each case the buyer is
under no obligation to
execute the contract and will
do so only if it is profitable.
http://www.options-trading-education.com/7093/trading-compound-options/

17. The difference in trading
compound options is the
second chance aspect of the
second contract.
http://www.options-trading-education.com/7093/trading-compound-options/

18. If in a call contract the price
does not rise sufficiently the
options contract is exercised
and a second contract takes
its place.
http://www.options-trading-education.com/7093/trading-compound-options/

19. The same happens with a put
contract.
http://www.options-trading-education.com/7093/trading-compound-options/

20. Contract Duration and Time
Value
http://www.options-trading-education.com/7093/trading-compound-options/

21. The time value of an options
contract comes from the fact
that anything can happen in a
volatile market.
http://www.options-trading-education.com/7093/trading-compound-options/

22. The longer the time that
remains until contract
expiration the more that can
happen.
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23. The potential back to back
aspect of trading compound
options gives rise to double
the time value of a contract.
http://www.options-trading-education.com/7093/trading-compound-options/

24. Depending on the exact
nature of the contract in
trading compound options, it
may be possible to exit the
contract during either the first
or second phase.
http://www.options-trading-education.com/7093/trading-compound-options/

25. This is typically done by simply
executing the opposite trade
on the same equity with the
same set of expiration dates.
http://www.options-trading-education.com/7093/trading-compound-options/

26. If the value of the contract in
either its first or second phase
has risen the buyer will make
money and if not he or she
will exit in order to contain
losses.
http://www.options-trading-education.com/7093/trading-compound-options/

27. In trading compound options
as in other options styles the
seller of the options contract
is obligated
http://www.options-trading-education.com/7093/trading-compound-options/

28. to fulfill his end of the bargain
and sell in the case of a call or
buy in the case of a put if the
buyer so chooses.
http://www.options-trading-education.com/7093/trading-compound-options/

29. Over the long run selling
options tends to be more
lucrative than buying them.
http://www.options-trading-education.com/7093/trading-compound-options/

30. However, there is always the
risk of a big loss when selling
options, which commonly
http://www.options-trading-education.com/7093/trading-compound-options/

31. limits the business of selling
options to those with deep
pockets.
http://www.options-trading-education.com/7093/trading-compound-options/

32. Practical options trading
tactics should always apply
whether one trades
compound options or other
styles.
http://www.options-trading-education.com/7093/trading-compound-options/