Learn To Trade Options

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Learn How To Trade Options And Make Money

Trading options is both similar to and different from trading stocks. Trading stocks offers many strategic possibilities from buying and holding a stock for the long term to a day trader’s use of technical analysis to make quick buying and selling decisions.In this regard,options and stock trading, are similar.

When an options trader is first starting out, he or she  needs to understand the basic difference between an option and a stock. An option is a “right to purchase” a particular stock over a period of weeks or months,and it expires on a specific date.The price of the stock itself can fluctuate, as we all know,over the expiration interval so there’s the usual volatility factor in market prices.

Options, however,since they expire on a specific date, have to be exercised before that date. Or you can choose not to exercise them at all. Plus, you can purchase an option for a fraction of the actual price of the stock.So options traders can leverage their investments.They can acquire the option to buy a $100 stock for only a fraction of that price.Hence, they can acquire options for more stocks than if they were actually purchasing the stocks outright.This leverage makes options very attractive as an investment.

There are different types of options,too. “American” options can be exercised any time before their expiration date, while “European” options can only be exercised on the expiration date itself.And to make matters even more complicated,these different types of options are not determined by “where” you purchase them.The “American” options tend to apply to stocks and bonds, while the “European” type applies more often to indexes. And options expire on the Saturday after the third Friday of the month. But U.S. markets are closed on weekends, so “American” options expire on the third Friday of the month and “European” options the following day.

An option is a contract that gives you the right to sell (a put option)a stock or buy (a call option) a stock on or before its expiration date.You have several choices when you purchase an option. You can either hold it until its expiration date and exercise it just before it expires, or you can exercise it any time before that date.Or you decide not to exercise it and try to sell the option before the expiration date and recoup a portion of your investment. If the option expires and you don’t exercise it, you lose your investment.Let’s look at these situations more closely:

Let’s say you buy an option for Acme Chemicals Corp.for $2 a share with a strike price of $20. Now most options contracts require a minimum purchase of 100 shares, so you’d have to pay $200 (for 100 shares) for the contract.Acme’s stock price rises to $25 two weeks later and rather than waiting for the expiration date, you decide to take your profit and run. You exercise the option, acquire the stock for $20 and turn around and sell the stock right away for $25.You deduct the  $2-per-share cost of the option and you’re left with a $3 per share profit,or $300 less brokerage fees. Pretty conservative, but you made money. And that’s good!

But consider the opposite scenario. What happens if the Acme’s share price doesn’t rise. What if it goes below $20? You could sell your options for less than the $2 you paid for them–say $1 per option–and you’d be out half of your $200, or $100. Bear in mind that owning an option does not require you to purchase the stock. So you can sell the option and recoup a portion of your investment. This is a lot better than if you had actually purchased 100 shares of Acme’s stock. You can jump in and exercise the option when you know you will make a profit, or you could wait it out until the expiration date and make your decision then. I personally think the more conservative approach is more likely to result in consistently positive returns, albeit perhaps lower than a more aggressive strategy. But that’s just me. Higher risk, higher returns. Greater profits. And potentially greater losses. Just like most other investments.

This is just a basic example of how options trading works. It is more complicated than this and you should really educate yourself before you commit much of your capital to it. The best options  trading tutorial I know is the one taught by David Vallieres,  which you can review here and the video above from the free demo video series he provides. What make this course so good is not only will you learn all the nuts and bolts about trading options, but David also shares with you his strategies that resulted in his success trading options.

Other Posts On Trading Options:

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The Difference Between Trading Stocks And Stock Options

In the stock market industry, the trade for stocks and stock options are often interchanged and many may be confused between the concepts behind these types of. … Stocks Versus Stock Options. By definition, stocks are actually shares of a particular company that can be traded through the act of buying or selling by an investor. If you happen to own a particular stock from a company, you are entitled to certain rights, which may include a profit …

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