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.
Stock options are called "derivatives" because they're derived from the stocks that are the foundation upon which they rest. In stock options contracts, you don't really buy or sell the stocks found within them, at least at first. Instead, what you're buying with stock options is a right, but absolutely no obligation, to purchase or sell in the future the actual stocks, which are usually grouped together in 100-share portions, contained in those contracts. Stock options trading activities are composed of a huge number of such contacts, though the vast majority of such deals aren't eventually exercised, to be honest.
There's no doubt stock option contracts are complex, though they're still very popular as an investment tool because they can be employed to facilitate many different strategies from an investment point of view. In truth, very conservative investment programs as well as those of a far riskier tone can be undertaken solely using stock options trading, though one should always remember that such trading isn't for the weak-kneed. After all, a stock option contract may bring with it the possibility of great reward but it also comes with an equal helping of great risk, most especially when you're a new trader and don't understand the strategy works. In other words, understand stock option contracts like the back of your hand before you begin trading them.
Neophyte investors eager to begin stock options trading should pause for a moment and ensure they're well-trained in the strategy and how option contracts operate before investing, if only to avoid the prospect of stress as well as potential financial ruin. Before sinking any money into a brokerage account, and all brokerages allow their more-experienced clients to trade such options, take an opportunity to closely study stock option basics and how these fascinating derivatives really work. For one, learn just what stock option contract "calls" and "puts" are, because they're very important. Basically, a stock option contract "call" gives you a right but not an obligation to buy the shares contained within that contract at a later date while a "put" gives you a right but not an obligation to sell those shares, also at a later date.
Stock options trading, and the contracts involved in the strategy, also features a fee or "premium" charged in each contract, such a premium being the price per underlying share found in the contract. Stock option contract premiums are the price per share charged to gain a right to purchase or sell those shares by a pre-set or agreed-upon date, in addition to being the cost to obtain the stock option contract in the first place. Stock option contract fees or premiums always vary by the particular contract, though. For example, a 100-share stock option contract might cost you a $100 premium, that hundred dollars being composed of a $1 per each share premium charged so that you obtain the right to buy or sell the stock before the contract reaches its expiration date, which is also known as its expiry.
When it comes to stock options trading, you'll always find a "strike price" attached to the contract's language, with that strike price being the price per share you'll pay to gain those stocks if you exercise your option rights. For instance, your purchase of a 100-share stock option contract might cost you a $1 per share premium, or $100, and then a $10 per share strike price if you really do exercise your call or put option. When you exercise your stock option contract rights you'll be on the hook for the $10 per share strike price, meaning $1,000 to the contract's writer (at $10x100 shares = $,1000), but if the stock's actually worth $13 per share your profit when you sell those shares will be high. If the stock found within your stock option contract is only worth $9 on the markets, and your strike price is $10 to obtain that stock, you'd generally just let the contract expire and decline to exercise 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.
Stock options trading can be exciting, of that there's little doubt, and you can check out the strategy by visiting the NASDAQ -- once known as the "National Association of Securities Dealers, Automated Quotation" -- website to see what it's all about. If you're already up to speed on the basics of stocks and how they're bought and sold and you're ready to jump into their derivatives by trading stock options, check out a few professional trading-type websites beforehand. Keep in mind that stock options and their contracts are complex, so spending some time in close proximity to professional traders, learning from them, is highly advised.
Stock options are called "derivatives" because they're derived from the stocks that are the foundation upon which they rest. In stock options contracts, you don't really buy or sell the stocks found within them, at least at first. Instead, what you're buying with stock options is a right, but absolutely no obligation, to purchase or sell in the future the actual stocks, which are usually grouped together in 100-share portions, contained in those contracts. Stock options trading activities are composed of a huge number of such contacts, though the vast majority of such deals aren't eventually exercised, to be honest.
There's no doubt stock option contracts are complex, though they're still very popular as an investment tool because they can be employed to facilitate many different strategies from an investment point of view. In truth, very conservative investment programs as well as those of a far riskier tone can be undertaken solely using stock options trading, though one should always remember that such trading isn't for the weak-kneed. After all, a stock option contract may bring with it the possibility of great reward but it also comes with an equal helping of great risk, most especially when you're a new trader and don't understand the strategy works. In other words, understand stock option contracts like the back of your hand before you begin trading them.
Neophyte investors eager to begin stock options trading should pause for a moment and ensure they're well-trained in the strategy and how option contracts operate before investing, if only to avoid the prospect of stress as well as potential financial ruin. Before sinking any money into a brokerage account, and all brokerages allow their more-experienced clients to trade such options, take an opportunity to closely study stock option basics and how these fascinating derivatives really work. For one, learn just what stock option contract "calls" and "puts" are, because they're very important. Basically, a stock option contract "call" gives you a right but not an obligation to buy the shares contained within that contract at a later date while a "put" gives you a right but not an obligation to sell those shares, also at a later date.
Stock options trading, and the contracts involved in the strategy, also features a fee or "premium" charged in each contract, such a premium being the price per underlying share found in the contract. Stock option contract premiums are the price per share charged to gain a right to purchase or sell those shares by a pre-set or agreed-upon date, in addition to being the cost to obtain the stock option contract in the first place. Stock option contract fees or premiums always vary by the particular contract, though. For example, a 100-share stock option contract might cost you a $100 premium, that hundred dollars being composed of a $1 per each share premium charged so that you obtain the right to buy or sell the stock before the contract reaches its expiration date, which is also known as its expiry.
When it comes to stock options trading, you'll always find a "strike price" attached to the contract's language, with that strike price being the price per share you'll pay to gain those stocks if you exercise your option rights. For instance, your purchase of a 100-share stock option contract might cost you a $1 per share premium, or $100, and then a $10 per share strike price if you really do exercise your call or put option. When you exercise your stock option contract rights you'll be on the hook for the $10 per share strike price, meaning $1,000 to the contract's writer (at $10x100 shares = $,1000), but if the stock's actually worth $13 per share your profit when you sell those shares will be high. If the stock found within your stock option contract is only worth $9 on the markets, and your strike price is $10 to obtain that stock, you'd generally just let the contract expire and decline to exercise 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.
Stock options trading can be exciting, of that there's little doubt, and you can check out the strategy by visiting the NASDAQ -- once known as the "National Association of Securities Dealers, Automated Quotation" -- website to see what it's all about. If you're already up to speed on the basics of stocks and how they're bought and sold and you're ready to jump into their derivatives by trading stock options, check out a few professional trading-type websites beforehand. Keep in mind that stock options and their contracts are complex, so spending some time in close proximity to professional traders, learning from them, is highly advised.
About the Author:
Before you even think about trading stock option contracts, make sure you check out the Option Millionaires website and its tutorials on stock options trading as well as its active stock options trader forums.. Unique version for reprint here: What Basic Stock Options Trading Is And How To Get Into It.
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