Options Trading – Understanding the Basics of Getting Started

Options Trading – Understanding the Basics of Getting Started

Options are considered to be versatile trading vehicles as they allow the investor to adjust to the market. Despite the monetary benefits from options trading, you need to be aware of the risks involved in trading these securities. Often times, when you are trading, you will always be shown a disclaimer indicating the risks involved with trading options. Investing is a risk, regardless of what you look into, but not investing is sometimes looked upon as the cowardly move. Before you even consider moving into options trading, you need to understand them and know how they work.

In the most basic terms, an option is essentially a contract that offers the buyer the right but not the commitment to either purchase or sell the underlying asset. Just by hearing this, you may think that options are easy enough to understand, but the real situation arises when you start trading in the real market with your own money. An option is a type of high risk security that moves according to price fluctuations in the market.

Suppose that you see a vehicle that you’d like to buy, which is valued at forty thousand dollars. However, due to financial reasons, you don’t have that money with you. In this case, you would talk to the seller to give you the option to purchase the vehicle at a later set date for a price that is higher. This option is given to you for the current price of two thousand dollars. In the simplest terms, this is what an option is.

Hypothetically, the market value of a vehicle does not rise overtime, but for our situation, let’s assume that it does. If the cost of your vehicle doubles in the next six months, the seller is required to sell the car for the same price quoted on the option contract. Similarly, if after a test drive, you see that the car is not worth the purchase, you can choose to not purchase the vehicle, since you are obliged to.

In options trading, there are two general types of options; calls and puts. A call is when the price of the stock rises above the price quoted on the contract by the expiry date. Each option contract has a set expiry date, which is basically the cut off date that the price is expected to fall or rise. This is sometimes referred to as having the long position on a stock, as you are expecting a price increase. Similarly, a put is when the buyer expects the price of the underlying stock to fall below the quoted price before the expiry date.

The buyer in options trading is said to be holder, who have long positions on a stock. Sellers are referred to as writers and they have short positions on a stock. As mentioned before, buyers have the right to purchase but are not required to. On the other hand, writers are obliged to sell, as per the binding agreement of the security. It is important to know the basics of options trading before you even start thinking about potential trades and purchases.

Best place to learn to trade options