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.
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.
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.
For hopeful stock options trading investors interested in checking out just what the excitement is when it comes to such options, the NASDAQ -- which was once known as the "National Association of Securities Dealers, Automated Quotation" -- website offers a promising start. Those already familiar with the basics of buying and selling stocks themselves and who are also ready to get into derivatives through trading of stock option contracts can check out several professional options trading websites. Because trading stock option contracts is indeed complex, spending much time hanging out with and discussing such options with trading professionals is advised as well.
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.
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.
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.
For hopeful stock options trading investors interested in checking out just what the excitement is when it comes to such options, the NASDAQ -- which was once known as the "National Association of Securities Dealers, Automated Quotation" -- website offers a promising start. Those already familiar with the basics of buying and selling stocks themselves and who are also ready to get into derivatives through trading of stock option contracts can check out several professional options trading websites. Because trading stock option contracts is indeed complex, spending much time hanging out with and discussing such options with trading professionals is advised as well.
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.. Also published at How To Get Started In Stock Options Trading.
This article collected, selected and written by: Author Van Hoc
Niche blogs are sometimes referred to as splogs, but this is a misnomer. Even though the desired end result for the niche blogger is to make money...
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