For most of us, when we hear the words stock option trading, we automatically think of shares of stock being purchased and sold on the Stock Exchange, but in actuality stock option trading is something completely different from that. For those of us not too familiar with the ins and outs of trading and the stock market, when you trade an option, you are trading a right to a stock. That right then gives the owner the authority to purchase or sell a certain stock within a set amount of time, for a pre-determined price. Not only are rights to securities and stocks sold in this manner, but government bonds, foreign currency, and stock indexes also use option trading.
If the option being traded is a right to buy securities, you may hear it referred to as a call option. A put option is a right to sell those securities only, with no buy option. If you hear the term double option, it is a combination of a call option and a put option, which gives the owner to power to both buy and sell the securities. Call options are usually used for securities that are thought to gain in value in the near future. For traders, call options give them the power to get a rising stock locked in at a low price, so that they can turn around and then sell that stock for a nice profit, assuming that the value rises as predicted.
If for some reason the value of the stock fails to rise as expected, then the trader is not required to make any purchase, thus protecting his funds. Traders often use put options when a certain stock is thought to be falling in value, just the opposite of the call option. When a trader purchases a put option, he is required to pay a fee to the person selling him the option, often quite a hefty one at that. This fee is referred to as option money. If the person who purchased the option doesn't use it, he only will lose the fee, or option money, that he was required to pay for the original put option.
Oftentimes, a smart trader can use put options to secure their own funds, and sometimes, make a great profit for themselves in the meantime. Keep in mind, that anytime you invest money in stocks or options, you do stand a chance of losing those funds, so you should only trade with money that you can afford to lose. Don't use your mortgage money, or your child's school fees to play on the stock market, it's just not a wise thing to do, especially if you don't have a clue to what you're doing. Make sure you have a good solid trading foundation and education before you take the plunge. Some good ways to better educate yourself on the workings of stock option trading, is to invest in stock and option trading products, such as ebooks, magazines, stock trading sites, or even go for a well recommended trading seminar.
Options' trading is a good way to cover yourself from major losses, in the event you make a bad choice or call on a particular stock or investment. Many people are also now starting to participate in online options trading as well, which makes it easier and faster, since it can all be done right from your home computer.
Brian makes his living as a full time trader and coach, if you enjoyed the article, be sure to get your FREE report. Find out more about Online Option Trading & Stock Option Trading
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Sunday, April 19, 2009
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