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Principles of Stock Option Trading and Why Trading Stock Options Can Be So Profitable

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  • Principles of Stock Option Trading and Why Trading Stock Options Can Be So Profitable

    New traders often have a hard time with the principles of stock option trading. Trading stock options, for the most part, is still relatively unknown to the general public. Those who do know how to trade stock options are usually too busy making money to teach anyone. Ultimately learning the principles of stock option trading will take some time, but with a good mentor by your side you should be okay.

    What are Stock Options?

    Technical Definition: If you buy or own a stock option contract it gives you the "right", but not the obligation, to buy or sell shares of a stock at a set price on or before a given date.

    It's merely a contract that grants you certain rights, the right to buy or sell a stock. Having a membership to the gym gives you the right to go to the gym, but you're not obligated to go. Neither are you obligated to buy or sell the stock.

    Principles of Stock Option Trading: The concept of buying and selling contracts

    Now let me explain how to trade stock options (the buying side only):
    1. You buy a contract
    2. Your contract goes up in value
    3. You sell your contract for more than you paid for it and pocket the difference



    That's it! That's trading stock options at its best.

    So as an options trader I'm essentially in the business of buying and selling contracts.

    "Real estate investors" buy and sell homes. "Option traders" buy and sell contracts.

    To make sure you fully understand the principles of stock option trading let me give you another example:

    Let's assume you find a house you want to buy for $100,000. You go to a realtor and submit a contract to the sellers, and it's accepted. Let's say the closing date is 3 months away. Within those three months Donald Trump announces he's going to build a high end golf course down the street from that house.

    My assumption is that property values in that area would most likely increase. So let's say the house increased in value to $130,000. Lucky you, you have a contract that says you get to buy the house for $100,000.

    Once you buy the house you could immediately turn around and sell it for a $30,000 profit. Or you could take the approach of an options trader.

    That contract now has more value because the underlying asset it's attached to has increased in value. So you could sell or assign your contract to someone else easily for $5,000 because that still leaves $25,000 equity left over in the deal.

    So when it comes to trading stock options it works the same way.

    Principles of Stock Option Trading: The concept of buying and selling stock option contracts

    IBM options are created for IBM the stock. As an options trader you're going to purchase a stock option contract that gives you the right to buy IBM for a set price. Let's say $50.

    Three months later IBM is trading for $65. You have a contract that says you get to buy it for $15 cheaper than everyone else. This contract has more value because the underlying asset it's attached to increased in value.

    I've been successfully trading stock options for years doing exactly what I've shown you above. I've also shown my students that learning the principles of stock option trading really doesn't have to be as hard as the gurus make it out to be.


    Article Source: http://EzineArticles.com/2456110
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    "Step into the arena and hold on to your hat. Don't get discouraged if you don't make 8 trillion dollars in your first month. Trading is not a get rich quick scheme. Realize that trading is a skill and just like any other skill it takes time to learn. Have convictions in your decisions in life and trading. Ignore the comments and "advice" of those that have never traded a day in their life."

    Good KARMA and positive energy abound.


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