Options Trading: The Basics

Being the best investor requires you have knowledge of all your trading options in order to make the most informed decisions. There are a number of options available to you and one of them could make you great returns if you use it properly despite the fact that it is so often misunderstood and that is option trading. Options trading is not a traditional investment in the same vein as stocks and bonds, so you truly need to understand options before you begin investing in them.

The potential for volatility is the biggest issue with options trading. However, it pays to realize that the volatility is actually in direct proportion to how much speculation the investor is willing to engage in. For example, someone who is used to trading in commodities and other similar securities will have little trouble employing the same types of speculative strategies in options trading. You should also be aware that speculation is not always necessary. Those who don’t find it very comfortable to speculate can actually afford to be more reserved when they deal with options.

Options and What They Are

When it comes to options, you are actually buying the right to purchase stocks or shares at a price that both you and the seller have agreed on. This contract is purchased by you from the seller and your goal should be to exercise your right to buy at a later date. This type of transaction is considered an option for two reasons. The first reason is that you are not under any obligation to buy the asset despite the fact that you have paid for the right to buy it. Second, acquiring the asset is something that will take place in the future – should you choose to exercise the option. Either way, you will pay for the contract whether or not you acquire the asset.

Thinking about purchasing the car of your dreams might help you to understand it more. You might pay the owner $5,000 for an option contract which allows you to purchase the car for $25,000 anytime within the next 90 days. During that time you have the ability to raise the cash, do a little more investigation on the vehicle, and decide whether or not it is an appropriate investment. If you decide to go through with the deal, you give the owner the $25,000 and he surrenders the car to you. If you decide not to go through with it, the owner keeps your original $5,000 and is free to sell the vehicle to someone else.

The Various Types of Options

Not only can you trade options in two different ways, there are two different types of options that you can trade. Let’s We will first look at the ways of trading.

The two ways to trade options are known as “calls” and “puts”~The two different ways of trading options are referred to as ‘puts’ and ‘calls’~’Calls’ and ‘Puts’ are what the two different ways to trade options are known as. A call is when you purchase an option which will allow you to buy an asset within a certain time for a certain price; a put is when you sell the option. There are both advantages and disadvantages to these and they are very similar. In order for calls to be profitable the price needs to be on the rise; falling prices are a benefit to those dealing in puts.

The two types of options that are available are American and European. When you buy an American option, you have to make your decision to exercise your option within the time period you have agreed. With a European option, it cannot be exercised until that term has expired. Just like calls and puts, both types of options have their advantages and disadvantages.

This article is only the tip of the iceberg in terms of options trading. However all you need to know now is that it can be done for a profit if you know what you are doing. If you’d like to try, but don’t know what you’re doing, there are plenty of online resources available for your learning.

Click here to find out more information on option trading and other aspects of investing on the stock market.

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