Explain Option Trading

If a would-be investor were to ask you how options trading works, how would you explain? Would you begin to explain option trading by defining the most basic terms? Or would you start everything by giving him a historical background?

What you would need is a simplistic approach in order to explain option trading even to the most inexperienced person. Probably the most understandable way to explain it is to give him a clear picture of what he’ll be dealing with. Tell this to him in the form of a story so he won’t easily get bored with the many terms and strategies. For one, you can tell him that with this type of trading, he won’t be purchasing any stocks or shares.

You can then explain this is a method to leverage the risks on any portfolio. With this, only a small amount of the capital is placed at risk while controlling a large amount of stock. You could further explain that options can be used in whatever condition the market currently has (whether it’s bearish or bullish).

You could continue to explain option trading by describing the activities to a would-be investor. Tell him that options are contracts between the holder and the writer (more popularly known as buyer and seller respectively). The activity centers on the rights given to someone to purchase shares of underlying assets at pre-established prices. The writer is then responsible to meet all the terms that have been set which include the buy or sell price and also the expiration date.

Another thing that you have to point out is, as an investor, you have to be watchful of the way the market moves. You need to familiarize yourself with the factors that affect the movement of the market so that you can predict in which direction it will most likely go. Know when to buy or sell according to this prediction (calls for rising trends and puts for downward trends). Tell him to keep in mind that profit is generally realized in trading the options rather than exercising the buy or sell prices.

One good piece of advice you can give to this future trader is to not go for the kill right away. Explain option trading in such a way that he would be more cautious about his actions. Knowledge and strategies should be utilized so that you can maximize your profit potential and minimize your risks. Tell him also to take his time as he explores the different systems and option trading courses that he could use in forming a trading strategy. Doing so will give him the power to fully understand what options trading is all about.

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