Options Trading Basics

Do you know what options are? Do you know how to trade them? Do you know how they work? Are you familiar with related terminology and strategies? Well, if not—there’s no better time to learn options trading basics than now. Options are great little securities that offer traders a more sophisticated way to grow their money and expand the diversification of their portfolio. So what’s the catch?

Well for one, they can be fairly complex. Unlike stocks, mutual funds, and bonds, these tricky little securities are not as straight forward as a regular exchange. Instead, they involve long time frames, the opportunity to exercise your option, a strike price, expiration date, and premium. Can you believe that all of these amenities pertain to one little trade? Yes, it can be slightly difficult to learn how to effectively trade with options.

Even once you learn the basics of options trading, the advanced strategic/analytical lessons will still be necessary. However, it’s not bad to start with square one, and so that’s where it is wisest to start. Below are listed the options trading basics you’ll need to get started:

Options Are Speculative
Like any other investment, you buy options based on how you predict an asset will be valued in the future. You buy an option to purchase an asset in the future at a given price. You pay for this option via a down payment known as a “premium,” which is nonrefundable and independent from the asset yield. You have until a certain date to buy the asset, but you are under no obligation to so.

So how do you make/lose money? Well, if the asset’s value plummets from the day you buy to the day you exercise, you’re buying an asset for way too much money. On the other hand, should the asset value skyrocket, you’re saving tons by exercising the option.

Strike Price
A strike price is the price that you agree to buy the asset at in the event you exercise the option. You essentially “lock-in” this price when buying the option.

Expiration Date
This is the last date on which you can exercise your option. After the expiration date passes, you lose the privilege to purchase the asset. If you let the expiration date pass, you simply do not exercise the option.

A premium is the price paid to purchase the option. Essentially, if you do not exercise, you still lose the premium. It’s the money you put on the line and should be purely risk capital—otherwise, you may lose a lot of needed money.

The options trading basics you’ve learned here can help you get started, so long as you pursue a more detailed education into the matter.

Related Articles

Learn Options Trading

Options Trading Strategies


Leave a Reply

Your email address will not be published.


This site uses Akismet to reduce spam. Learn how your comment data is processed.