Option Trading Explained

What is Option Trading?

Option trading can be quite exciting and profitable. If you have never done it before, let me explain how simple it can be.

Buying or selling an Option is buying or selling the "right" to trade a stock. Your are never obligated. You purchase an option to give you the right to do so if you desired.

There are several reasons why one would trade options instead of stocks. I can't go into them all here but a few reasons are:

• You can use leverage to control more shares with less money.
• To hedge a current profitable position.
• To limit loss while allowing for unlimited gain.
  

Before you can buy or sell an Option, you must decide on its terms. You must know:

• The underlying stock symbol (the actual stock you have a right to).
• The price you wish to buy or sell the stock at.
• The deadline you want before the Option expires.
  

There are two types of Options, Calls and Puts. A Call gives you the right to buy the stock. A Put gives you the right to sell a stock. You would usually buy Calls when the market is going up and buy Puts when the market goes down.

Now here is where it gets confusing (if you are not already). In addition to buying Calls and Puts, you can sell Calls and Puts. Selling a Call is nothing more than selling to another investor the right to buy stock from you (perfect if you were going to sell your stock anyway). Selling a Put is giving another investor the right to sell you stock at a specified price in the future (great if you like to buy stock below current price).

These options are traded the same way as stock. You can buy to open and sell to close, or in down markets, sell to open and buy to close.

By Will Boyett