Options Trading Basics In Plain English - What Are Options?
Options Trading Basics In Plain English - What Are Options
?What's really neat about options trading is you can make money regardless of the market direction. So your objective is to accurately predict the direction of a stock within a specified time and position yourself accordingly.
One great benefit of options is the ability to control a large amount of stock with a relatively low amount of capital. A single option is a contract between two parties who agree to buy or sell to each other the underlying security at a set price and at a set time. This may sound risky and is the reason why the myths exist. However once you understand the whole picture you will see that the myth has a bigger bark than bite.
Each contract controls 100 shares of the underlying security. All options have a fixed exercise or strike rice and an expiration date. You will find many different option contracts available for any given security and the option contract you select will be based on your objectives.
Let's say your analysis indicates a stock is going to go down in value over the next few months, wouldn't it be great if you could own the right to sell that stock for today's higher price at that time and keep the difference? Or vice versa if you believe a stock is going up over the next few months wouldn't it be great to own the right to buy it at today's lower price at that time and pocket the difference?
This is the foundation of what an option is and the difference between the now price and the future price less what you paid to buy that right is what you stand to gain on trading that option.
The best part about option trading is if you are wrong, the most you can lose is the price you paid to own that option. When you compare this to owning a stock which can fall in value by an unknown amount, even to zero look at GM, the known downside of options trading is far better for investors to know.
The two scenarios described have names; the first is called a PUT option, because you have the right to put the stock back into the market, (sell) at the higher than market price. The second scenario is referred to as a CALL option because you have the right to call to you, (buy) the stock at the lower than market price.
From these two scenarios there are plenty of variables to understand plus some options trading strategies which will minimize your risk even further. Naked calls, naked puts, covered calls and puts, iron butterflies and condors just to name a few are required learning if you want to become a seasoned options trader.
There are a series of video options trading tutorials for you to learn options trading and start options trading like the professionals at http://www.optionsource.net
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