Do you know all about trading options? Well let’s begin with the basics. Options are interesting little securities that resemble, in some ways, futures contracts. But to zero in on what an option is: it’s a type of security, like a stock, bond, or mutual fund. You buy them and sell them.
Sounds simple, but these are slightly more sophisticated, complex even. They are based on an asset, like a stock or fund, but involve multiple components. They serve the same purpose, though: a way to make money via predictions about future market fluctuations. Here’s a short option trading tutorial that will show you how they work and a disclaimer that will help you best prepare for handling them.
Options involve an underlying asset. That may sound like a strange concept, but it’s really not. An underlying asset can be as simple as 300 shares of Google’s stock. That’s the only real asset involved in the option, and the results all depend on how the stock performs.
Basic overview: you buy a stock option with an expiration date and strike price. At any time prior to the expiration date, you can purchase the underlying asset for the agreed-upon, designated strike price regardless of the asset’s value at that point in time.
When you buy a call option, for instance, you do the following:
Pay a premium for the options—all options come with a cost, because, as you’ll soon find out, this is how sellers make their money
You agree on a strike price with the seller. This is the price that you can buy the asset at. It is locked in when the purchase is made, meaning it will not change, even if the underlying asset skyrockets in value (which would lead to big profits for you.)
You agree on an expiration date, which limits the time frame in which you can exercise your call option (which is to buy the asset at strike price.)
You then wait it out, monitoring the asset and choosing each day whether it is appropriate to exercise your option.
If you did buy a Google stock option, your decision to exercise would be based on Google’s stock price. If it sunk to dangerous depths, you would of course pass on the option (that’s true of options: you have no obligation to buy the asset…just the “option,” get it?)
But if the stock price goes through the roof, you might choose to exercise your option. For instance, an option allows you to buy Google by the share at (theoretical/hypothetical/example figures being used here) $550 instead of $690 if your strike price is $550 and the $690 price happened prior to the option’s expiration date. Easy as pie!
But here’s the disclaimer: as often as people win big with options, other people LOSE even bigger. The difference between wining and losing in this category is education through a much more in depth option trading tutorial and/or helpful courses and literature. Happy trading…and reading!
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