What is Options Trading?

Wondering what options trading even is? Well you’re on the right track. Curiosity is the pathway to learning. Option trading is actually pretty interesting, just a more advanced way to make money on the stock market. You’re probably familiar with how stocks work. You buy a share of a stock, wait for it to go up in price, and then sell it for a profit.

Most experienced traders understand that quite well.  But I’m amazed when I start talking to them about options and many of them ask, “What is options trading anyway?”

With option trading, your goal is to predict the future of stocks, but the format is quite different. When you buy a stock option, you buy a privilege, not the stock itself. For example, if you buy a call option of a particular underlying asset (say 300 shares of Google,) you purchase the option to buy the 300 shares at any time before the option’s expiration date. In exchange, you pay a small fee known as a “premium.”

So why should you buy the right to buy stock? Doesn’t everybody already have that privilege? Yes, but with an option, you purchase the privilege to buy the underlying asset at a pre-determined price known as the “strike price.” When enacting an options contract, the two parties agree on a strike price. This is the price at which, if exercised, the buying party will purchase the underlying asset (usually per share.)

So what does this mean? This means you can buy a stock valued at $10/share for a strike price that may be lower. Of course, there is always risk involved with this equation. Nobody is going to just hand out a low strike price. But if a stock price goes up significantly between the time you buy the option and the expiration date, you can save (and then make) a large sum of money from the transaction.

In this way, options allow fledging traders the opportunity to control a lot more stock than would otherwise be possible due to budgetary constraints.

There are two kinds of options, though both generally promote the same idea. Explained above are “call” types. With “put” options, the other kind, you simply buy the privilege to sell the underlying asset at the strike price prior to an expiration date. A premium fee still applies. The difference, then, is that you profit from the stock price going down, as you can sell a cheap asset for more than it’s worth and profit accordingly.

That, eager learners, is what options trading is all about.  If prior to reading this article you were asking – what is options trading? – hopefully now you have at least a general idea.

Related Pages

Options Trading

Learn Options Trading Before Jumping In

Leave a Reply

Your email address will not be published.


This site uses Akismet to reduce spam. Learn how your comment data is processed.