What Basic Stock Options Trading Is And How To Get Into It
The financial markets are filled with easy-to-understand as well as complex financial instruments. For example, the concept of stocks and bonds is relatively easy to grasp and they can be just as easy to trade. Of course, there are a myriad of ways to trade in stocks, including in derivatives known as options. Option contracts for stocks are somewhat complex, however, and understanding how to get started in stock options trading is a must before you dive into this potentially lucrative, as well as potentially risky, investment strategy.
In the financial world, stock options are known as derivatives because they derive their existence from the actual stocks that serve as their foundation and reason for existence. In a stock option contract, you're not actually buying or selling the underlying stocks found within the contract, at least initially. Rather, what you're purchasing with a stock option contract is a future right but not an obligation to buy or sell the stocks, usually bundled in 100-share packets, contained within the contract. The stock options trading world is filled with countless options contracts, most of which aren't even exercised, to tell the truth.
Stock option contracts are complex and that's the plain fact of the matter, but with such complexity comes great potential reward and great flexibility in investing, which is why they're also very popular as investment instruments. Truthfully, stock option contracts can fit well with conservative as well as extremely risky investment programs, but in all circumstances the trading of them definitely isn't for the queasy or weak-at-heart. While stock option contracts can indeed bring a lot of money back as a reward they also bring an equal or even greater chance of financial ruin if they're traded poorly and when you just don't understand how they work. Put simply, you need to learn all you can about stock options trading before you dip even a toe into their potentially turbulent waters.
Most neophyte investors are strongly advised to learn all they can about how stock options trading works before they take up the investment strategy precisely because financial ruin awaits if they don't do it correctly. Before funding a stock brokerage account -- and all reputable stock brokerages offer clients the ability to trade in stock option contracts -- read up on the basics of stocks and their derivative options. Understand, as well, what a stock option "call" is versus its opposite, the stock option "put." In stock options, a "call" is a right to buy an agreed-upon number of stocks in a contract, while a "put" is a right to sell an option contract's shares.
When it comes to stock options trading, contract fees or "premiums" per underlying share in the option contract are another key concept. A stock option contract premium is the price per share that you'll pay to obtain the option to buy or sell those shares in the future, and it's also your total cost to obtain that contract unless and until you exercise your option rights. When it comes to a stock option contract's premiums or fees, their costs vary by the contract. For instance, there might be a $1 per share premium attached to each underlying share within the 100-share block within the contract, or a $100 total premium at $1x100 shares to gain the right to purchase or sell the stock before the contract's expiration date, or expiry.
In stock options trading, there's always something called a "strike price" to be found, such a price being what the contract's buyer will have to pay on a per-share ratio to obtain those stocks. You might buy a 100-share stock option contract for a $1 per share fee or premium for $100, for example, and then pay a $10 per share strike price if you actually do exercise your option rights. Exercise of your stock option contract's rights before the contract expires obligates you to pay the contract's writer -- who's typically another investor -- $1,000 or a $10 per share purchase price time 100 shares, total. If the stock on which you just exercised the option to buy is priced on the market at $13, but you only paid $10 to obtain it, your profit will be relatively handsome. If the stock you're considering buying, should you exercise your option rights under your stock option contract, is only worth $9 on the markets all you need to do is let the contract die at expiration date, thus not exercising your option rights.
Once you've gained a basic understanding of just what a stock option contract is, you should consider taking some time to hang out with and learn from experienced stock options trading professionals. The Internet and the World Wide Web are filled with websites promising in-depth education on stock option contracts as an investment strategy. If you hope to succeed in the practice of trading in stock options investigate any website promising education in stock options fully before committing to it. And always be wary of websites promoting some sort of "autopilot" stock option contract trading software. You can make great wealth, as well as quickly lose your shirt, on stock options and options trading autopilot software holds more peril than promise for newbie investors.
There's little doubt that stock option contracts can be an exciting investment vehicle, and you should head over to the NASDAQ -- it was once called the "National Association of Securities Dealers, Automated Quotation" -- website to get an idea of what you're involving yourself in. If you've previously gained experience in the ins and outs of stocks and bonds and how they themselves are traded and you think you want to try your hand at stock options trading ensure you head over to several professional stock options trader-type websites before beginning. Always remember, as well, that stock option contracts are somewhat complex, and that the more time you can spend associating with professional options traders, learning from them, before striking out on your own, will always be helpful.
In the financial world, stock options are known as derivatives because they derive their existence from the actual stocks that serve as their foundation and reason for existence. In a stock option contract, you're not actually buying or selling the underlying stocks found within the contract, at least initially. Rather, what you're purchasing with a stock option contract is a future right but not an obligation to buy or sell the stocks, usually bundled in 100-share packets, contained within the contract. The stock options trading world is filled with countless options contracts, most of which aren't even exercised, to tell the truth.
Stock option contracts are complex and that's the plain fact of the matter, but with such complexity comes great potential reward and great flexibility in investing, which is why they're also very popular as investment instruments. Truthfully, stock option contracts can fit well with conservative as well as extremely risky investment programs, but in all circumstances the trading of them definitely isn't for the queasy or weak-at-heart. While stock option contracts can indeed bring a lot of money back as a reward they also bring an equal or even greater chance of financial ruin if they're traded poorly and when you just don't understand how they work. Put simply, you need to learn all you can about stock options trading before you dip even a toe into their potentially turbulent waters.
Most neophyte investors are strongly advised to learn all they can about how stock options trading works before they take up the investment strategy precisely because financial ruin awaits if they don't do it correctly. Before funding a stock brokerage account -- and all reputable stock brokerages offer clients the ability to trade in stock option contracts -- read up on the basics of stocks and their derivative options. Understand, as well, what a stock option "call" is versus its opposite, the stock option "put." In stock options, a "call" is a right to buy an agreed-upon number of stocks in a contract, while a "put" is a right to sell an option contract's shares.
When it comes to stock options trading, contract fees or "premiums" per underlying share in the option contract are another key concept. A stock option contract premium is the price per share that you'll pay to obtain the option to buy or sell those shares in the future, and it's also your total cost to obtain that contract unless and until you exercise your option rights. When it comes to a stock option contract's premiums or fees, their costs vary by the contract. For instance, there might be a $1 per share premium attached to each underlying share within the 100-share block within the contract, or a $100 total premium at $1x100 shares to gain the right to purchase or sell the stock before the contract's expiration date, or expiry.
In stock options trading, there's always something called a "strike price" to be found, such a price being what the contract's buyer will have to pay on a per-share ratio to obtain those stocks. You might buy a 100-share stock option contract for a $1 per share fee or premium for $100, for example, and then pay a $10 per share strike price if you actually do exercise your option rights. Exercise of your stock option contract's rights before the contract expires obligates you to pay the contract's writer -- who's typically another investor -- $1,000 or a $10 per share purchase price time 100 shares, total. If the stock on which you just exercised the option to buy is priced on the market at $13, but you only paid $10 to obtain it, your profit will be relatively handsome. If the stock you're considering buying, should you exercise your option rights under your stock option contract, is only worth $9 on the markets all you need to do is let the contract die at expiration date, thus not exercising your option rights.
Once you've gained a basic understanding of just what a stock option contract is, you should consider taking some time to hang out with and learn from experienced stock options trading professionals. The Internet and the World Wide Web are filled with websites promising in-depth education on stock option contracts as an investment strategy. If you hope to succeed in the practice of trading in stock options investigate any website promising education in stock options fully before committing to it. And always be wary of websites promoting some sort of "autopilot" stock option contract trading software. You can make great wealth, as well as quickly lose your shirt, on stock options and options trading autopilot software holds more peril than promise for newbie investors.
There's little doubt that stock option contracts can be an exciting investment vehicle, and you should head over to the NASDAQ -- it was once called the "National Association of Securities Dealers, Automated Quotation" -- website to get an idea of what you're involving yourself in. If you've previously gained experience in the ins and outs of stocks and bonds and how they themselves are traded and you think you want to try your hand at stock options trading ensure you head over to several professional stock options trader-type websites before beginning. Always remember, as well, that stock option contracts are somewhat complex, and that the more time you can spend associating with professional options traders, learning from them, before striking out on your own, will always be helpful.
About the Author:
Before you even think about stock option investment strategies trading, make sure you check out the Option Millionaires website and its tutorials on stock option investment strategies trading as well as its active stock option investment strategies trader forums.
