There are a wide range of investment securities found on the stock market, and they range from easily understood to very complex. Stocks and bonds, for instance, can be fairly easy to understand and just as easily traded. However, the are countless ways to trade stocks and derivatives of them, known as options, are included. In the universe of stocks as investment securities, though, option contracts are a bit complex and you need to understand them thoroughly before getting into trading them, because while stock options trading is lucrative when done right it's also financially ruinous when done wrong.
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.
Though complex, stock option contracts are a popular trading tool because they can be used in a wide variety of investment strategies. Conservative as well as high-risk strategies and everything in between all lend themselves well to the intelligent use of stock options trading, but never forget that trading stock options isn't for the faint of heart. With potentially great reward, and stock options can bring lucrative financial payoff, comes potentially great risk, especially if you don't understand stock options, their contracts and how they're traded. Thoroughly understand stock options contracts before trading them, in other words.
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.
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.
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.
After you've gotten a good handle on just what stock option contracts are, think about taking a bit of time to associate with and then learn from experienced investment professionals. The World Wide Web, of course, is loaded with countless websites that promise to deliver quality education in stock option contracts and their use as an investment strategy. But if you really hope to achieve success in trading stocks and their options you need to also check out any website you come across that promises to help improve your ability to trade stock options before you commit to it. Additionally, be careful of any finance website promoting "autopilot" stock options trading software. While you can make a lot of money with stock option contracts you can also lose even more by trusting solely to some sort of automated trading software program.
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.
Though complex, stock option contracts are a popular trading tool because they can be used in a wide variety of investment strategies. Conservative as well as high-risk strategies and everything in between all lend themselves well to the intelligent use of stock options trading, but never forget that trading stock options isn't for the faint of heart. With potentially great reward, and stock options can bring lucrative financial payoff, comes potentially great risk, especially if you don't understand stock options, their contracts and how they're traded. Thoroughly understand stock options contracts before trading them, in other words.
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.
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.
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.
After you've gotten a good handle on just what stock option contracts are, think about taking a bit of time to associate with and then learn from experienced investment professionals. The World Wide Web, of course, is loaded with countless websites that promise to deliver quality education in stock option contracts and their use as an investment strategy. But if you really hope to achieve success in trading stocks and their options you need to also check out any website you come across that promises to help improve your ability to trade stock options before you commit to it. Additionally, be careful of any finance website promoting "autopilot" stock options trading software. While you can make a lot of money with stock option contracts you can also lose even more by trusting solely to some sort of automated trading software program.
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 stock options trading, 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.. Free reprint available from: How To Get Started In Stock Options Trading.
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