What Is Options Trading?

In a volatile economy, if you know what you are doing

, options trading can be a great way to make money for a small investor. Options are purchased with no obligation to take any action on them. It is important to remember, though, that options involve some risk and that there is a binding contract with any options trading.

Options are basically contracts that give the purchaser the right to buy or sell a stock or other security for a fixed amount within a given time period. In the United States, one option is usually equal to 100 of its underlying shares. It is advised that if you are a beginner looking into options, you should take an options trading course before pursuing this form of trading. You can learn the methods, like covered call trading, used by professional money managers to control their risk and protect their gains.

There are some things to remember when trading options:

"You are not obligated to take any action with the options that you purchase. For example, if you purchase options and choose to do nothing with them the options become worthless once the expiration date (from 30 days to several years) passes. You would lose 100% of your investment in the option at that point.

"Options are basically contracts on a stock or an index, In most cases, depending on what the underlying asset of the option is, the seller of the options does not actually transfer any assets until the buyer decides to act upon the options that they have purchased.

"By studying the particular stock or stocks that you are thinking of pursuing an option on, you can help yourself avoid losses and "worthless" options at the time of expiration

There are two basic kinds of options generally available.

"A "call" option is when a purchaser buys the rights to an agreed upon quantity of an underlying stock or other asset from the seller. These are normally purchased when the buyer expects the stock to go up in value. It is incumbent on the purchaser to take action on these options before the option expires, if it makes financial sense to do so.

"A "put" option is the inverse of the "call" in that the "put" buyer has the right to sell an asset at a predetermined price prior to expiration of the "put" options. These would normally be purchased if the buyer expects the stock or other asset to lose value.

Options trading can involve a great deal of risk when purchased individually, but if you are knowledgeable you can perform sophisticated actions that make the use of options less risky and more rewarding than simple stock purchases. If the investor makes the effort necessary to educate themselves on these advanced methods, they can go a long way towards generating consistent income and minimizing their risk

by: Paul Mikos

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