How to Trade Options

Do you know how to trade options? If not, you may be interested in this article. Options are a world of opportunity for sophisticated traders up to the challenge of dealing with them. They may be viewed as risky, but if used properly, they provide a multitude of investors with a solid stream of income and capital gain. This article will discuss how to trade options at a very fundamental level.

Let’s begin by exploring what an option is. An option is an agreement enacted by two parties pertaining to a particular underlying asset. Generally, an underlying asset is a collection of stock. For instance, an option contract could be written on an underlying asset composed of 500 shares of Microsoft. Ultimately, the value of the option is tied to the stock price of Microsoft. But how exactly are the two related?

When you buy a call option, for example, you are purchasing the legal right but not the obligation to buy the underlying asset at the strike price at any point prior to the expiration date. All of this understandably demands a little bit of explanation. The strike price is a price agreed upon by both parties prior to the exchange. The expiration date is the same thing, essentially: a date agreed upon by both parties prior to the exchange. Essentially, you can choose to purchase the underlying asset at the strike price before the expiration date. There are circumstances in which this would make practical sense.

Say, for instance, the real market value of Microsoft went up. You could still buy shares of the company for the strike price, which may be significantly lower than the real stock price. This means you get a remarkable discount on the purchase of the stock. You can sell this stock for its current value on the market and make a huge profit. Alternatively, because the option price adjusts with the fluctuation of the underlying asset’s price, you could simply sell the option and make the same money.

Options are not free.  They come at a price. This fee is known as the premium. The premium is paid by the buyer of the option and goes to the seller. When you buy an option, you pay the premium and invest that money into the opportunity. When you sell an option, you receive the premium.

These are the basics of how to trade options. While you’ll need to learn much more about options to begin trading them, hopefully this article clears more than a few things up about the industry.

Related Pages

Options Education

Stock Options Basics

 

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