Candlestick Trading Blog
February 26, 2010
Spot Price
| The spot price of a stock, stock option, or futures contracts is the current price, the price at which it can be bought or sold today. This is the price for immediate settlement, payment and delivery. In options trading the spot price is the stock price at which the stock shares sell at the time the options contract is settled. The strike price is the stock price at which the contract is settled. The difference between the spot price and the strike price is the profit or loss in the transaction, plus or minus the premium paid. The spot price of stock shares takes into account the anticipated future value of the stock. The spot price rises and falls with stock market news of anticipated earnings, other activity in related market sectors, and technical analysis of the stock. In commodity trading a spot price of a perishable commodity is just the price today. For example, if a trader buys gold futures for December delivery and it is February the gold will not spoil over the intervening 10 months. This is not necessarily true of California grapefruit which will eventually go bad if not consumed. In futures contracts and options trading the spot price is the focus of trading activity and current contract price. If stock price factors change then the difference between the expected, future price of the stock and the strike price changes. This makes the options contract more or less valuable which can lead to profit or loss for traders. If the spot price does not move away from the strike price with time the value of the options or future contract diminishes and if the price moves in a direction where the buyer will make money when exercising the option the option is said to be in the money. To predict the spot price at which an options contract will expire, the trader will use the same basic stock investing tools that he or she uses to trade stock. Both fundamental analysis and tools such as a price to earnings ratio are helpful in predicting future stock prices. The investor will follow the current stock price and attempt to exercise the options contract at the maximum difference between spot price and strike price. This is possible in United States options trading as options can be exercised at any point up until expiration whereas in European options trading the option can only be exercised at expiration. Spot price is a term typically used in futures, options trading, and, to a degree in day trading. It is usually not used for investing in stock. Market price is a more common term for the current price of a stock as used in long term investing. The terminology used by those interested in value investing, for example, is more focused on fundamental analysis of return on investment and retained earnings. Where the focus in on long term holdings and rates of return on long term investments the daily stock price is of less importance to the investor than financial health and prospects of the company involved. The current price only becomes a concern if, over time, it stagnates resulting in poor returns on investment. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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