Option Trading Basics

You can make great strides in diversifying your portfolio by considering and ultimately investing into options. What are options? In this article, we’ll discuss option trading basics – what options are, how they function, and what opportunities they can provide to investors like you.

For starters, options are securities that function in a way similar to more traditional ones like stocks, bonds and mutual funds. To compare options to these would be, however, difficult, as options often are based on an underlying asset, usually including other securities like stocks.

To illustrate the concept, think about it like this: an option is a contract you make with someone else to buy stock from the seller at a future date at a particular price. In reality, they’re considerably more complex, but it helps to get a broad stroke picture as you begin to delve into option trading basics.

There are two types of options: calls and puts. With calls, you purchase the privilege but not the obligation (ergo, the option) to buy the particular underlying asset at any point prior to the expiration date at a specified strike price.

With puts, the situation is reversed. With this type of security, you purchase the option to sell to someone at a particular price before the expiration date. Regardless of which type of option you decide upon, you will pay a premium, or a fee to the seller. This allows both buyers and sellers of options to get a chance to make some money.

Ultimately, determining which option contracts will profit you is a matter of accurately predicting market fluctuations. You need not be a professional analyst to determine that accurately forecasting the market is no easy task. If it were, there would surely be a lot more millionaires out there.

So it’s fairly challenging to pick the right deals, but doing so can be incredibly lucrative. If the price goes up after you buy a call, you buy stock assets at a greatly discounted rate. If the price goes down on a call, you can sell worthless stocks for higher than market rate. Additionally, you can always trade options back into the market, but that’s where things become a little more complex.

For that reason, it’s very important to become well trained in more than just option trading basics. There is a whole pool of knowledge that details the fine intricacies of options trading and the strategies that define it. Becoming well read on these matters will fuel your progress as an options trading expert.

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