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What Is Options Trading?

Filed Under Options Trading | Print This Post

Bull Market Bear Market Options, like foreign exchange or futures, are forms of securities that you can invest and trade in the stock market. Options are considered based on normal stocks.

Very much like futures, an option gives you the right, but not the obligation, to buy an underlying stock at a specified price at a specified date in the future. You earn a profit if the stock’s market value rises above the price by which you acquired your contract upon the agreement’s expiry. If the stock’s market value drops, then you lose your premium.

There are two forms of options: the call option and the put option. If you buy a call option, you are expecting your stock price to go up and you would prefer the put option if you expect the opposite, meaning you expect prices of your stock to decline.

The good thing about options is that because they are exercised at a specific time frame and its rates are based on a set price, the risks that you stand to face are controlled and limited.

If you are buying call options, you are likely to benefit from this condition. On the contrary, if you are selling put options, you may keep the value of the options you laid out on the table if these are not picked up and bought within the time frame specified.

Be reminded that stock options are named such because these are actually options. These shares are special and unique in the sense that the are different and are treated differently compared to the regular and normal stocks and shares traded in the market.

The price tags are also somehow different most of the time to the current and prevailing stock prices of a particular stock. Usually, stock options are traded at premium prices, or in other words somehow higher than the usual trading price of the stock in the market. But this is a very small price compared to the amount of protection options give you against risks, compared to common stocks.

Some stock option holders choose to wait until the last minute to exercise their stock, in the hopes of seeing the value rise further, but experts against this technique, because you could end up profiting a lot less than what you could have gained had you done so earlier.

Options distributed for a variety of reasons, but most of them are according to the following:

- companies want to retain their top performers and attract good candidates from outside with incentives

- companies want their staff to feel accountable for the company’s performance by making them feel as if they are partners or owners in the business

- companies want to hire workers who are skilled in their chosen fields by offering incentives and compensations that are attractive

If you are risk averse but would want to maximize your investments, then online option trading might work best for you. But of course, you have to equip yourself with as much knowledge as you can.

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Comments

5 Responses to “What Is Options Trading?”

Ryan Kristomuljono on July 17th, 2007 4:29 pm

I love to trade options. it give me leverage.
JMOT on July 18th, 2007 3:29 pm

Thanks for visiting my site!

Yes, I agree with you that Options are more complex and that we must be sufficiently equipped to be able to deploy the appropriate Option strategies.
Tanady on July 18th, 2007 9:44 pm

Thank you Ryan and JMOT for visiting my site, and giving some comments.

Options trading is indeed a great leverage, and we need to get equipped before we enter any market.
dan on July 20th, 2007 11:35 pm

Thanks for checking out my site…Seems as though you are rocking out the options yourself, keep up the good work….

-D.C.

http://www.dailyreckoning.com/rpt/UnderstandingOptions.html
Tanady on July 22nd, 2007 10:21 pm

Hi Dan,

Thanks for the support.

Great day!