Explain Option Trading – Quick Start Guide
Option trading can be quite exciting and profitable. If you have never done it before, let me explain option trading and 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. Here are but a few reasons:
* 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 the terms of the contract. You must know:
1> The underlying stock symbol (the actual stock you have a right to purchase or sell).
2> The price you wish to buy or sell the stock at (called the strike price).
3> The deadline you want when the option expires (closer the deadline the less the option costs).
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, as I explain option trading (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).
Options are traded the same way as stock, you buy and sell them through your stock broker or online stock brokerage.