Options trading is a form of trading stocks that requires a little more knowledge than the basic buying or selling of stocks, but it is not difficult to do. The largest confusion anyone has with this type of trading is the vocabulary that goes along with it. Once you have a basic understanding about how it works, you can determine if this method is right for you. Many people enjoy it because of its certainty, as well as the ability to limit the risk of large financial losses.
The Basics
The two types of options are put and call. A put simply means the owner of the contract has the right to sell 100 shares at the specified price in the contract whenever they desire as long as the option has not expired. The person who sold the put must buy the shares when they are sold. A call option means the owner of the contract has the right to buy 100 shares at a specified price at which the owner of the contract must sell them when it is exercised.
The Difference from Stocks
The main difference between stock and options trading is that options do not carry a cash value. They are simply a contract during which the owner has a specified time period to exercise. When the owners do decide to exercise their right to deliver the contract, the options then carry a cash value that is dependent on the value specified in the contract. It is important to remember they do expire after a certain time period, even if they are not used.
Reducing the Risk
One of the largest advantages of purchasing options is the ability to eliminate your risk. The people who typically take part in options trading are those who do consistent research on the market and have strong feelings about which way the market is going to go. The feelings are typically based on history, timing and experience in the stock market.
Many people become easily overwhelmed when they hear the term options trading. While it is not as straightforward as trading stocks, once you understand the basics of it, it becomes much easier to understand. The main advantage of trading options rather than stocks is the ability to exercise your right to buy or sell when it is most advantageous to you, allowing you to make the largest return on your investment.
