Option Trading Tutorial

Perhaps you’ve heard of options. They’re trusty financial instruments through which investors rake in thousands of dollars per year. Like any other security, people roll the dice and make a prediction based on which direction they predict the market will head whenever they transact stock options. Unlike basic securities like stocks and bonds, options give the buyer a bit more of…. well, of an option.

To fully understand what that means, you’ll need to know how options function and how they’re structured. This short option trading tutorial will aim to provide you with this information and render you a better trader in the process.

So what are options? Well, here’s it how it works. Say you buy a call option for 100 shares of Google with a strike price of $160 per share, expiring in three months. This means that at any time within the next three months, you can exercise this option.

When you exercise the option, you purchase the 100 shares of Google at $160 per share regardless of what the market value is at the given time. Therefore, if the Google price skyrockets to $230, you’ve made a sizable profit. This is only an example of how it works, but this can happen to any extent and with any stock. When investing in call options, you can make big profits through fluctuations upward. In this way, you can buy big-ticket stocks at great discounts and then sell for gain.

But you certainly don’t need to exercise an option—that much is optional. For instance, if the market value of Google’s stock dipped instead to $130, purchasing 100 shares at a price inflated by $30 would seem ridiculous. You never have to exercise an option, that doesn’t mean there’s any risk.

There will always be risk when it comes to investment. Nobody can predict the future, but investors try to profit by making predictions. When one side wins, another loses. That’s a fundamental truth to investing money in any type of instruments. Options are no different. While you don’t have to exercise a lousy option, you will have to pay an upfront fee to purchase it. This is called the premium, and it will be paid whether you let your option expire, trade it to another person, or exercise it.

While premiums increase risk, the very nature of options provides enticing opportunities for capital gains. With the right training and the right strategies (aka, more than just this option trading tutorial), a savvy trader can explore the world of sophisticated option wheeling and dealing.

If you enjoyed this short option trading tutorial, learn more about trading options from an expert option trader that’s been trading for over 25 years and currently trades options for a living.  A very good living, I might add.

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