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Options Trading 101 - Your Simple Guide To Trading Options

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  • Options Trading 101 - Your Simple Guide To Trading Options

    This article is to help people looking to get into options trading. The is an extremely complex part of the market; so as much as possible I have tried to simplify the concept to make it easier to digest and understand

    If you don't understand the basics of options trading (most people) then it can be a very quick way to lose lots of money. Bearing in mind this is a very risky form of investment I wanted to explain what exactly options trading involves in a way everyone can understand.

    I hope you use this article to understand the concept in greater depth and make money from options trading.

    A Definition of Options Trading

    Definition:An option is the right, however not an obligation to buy or sell an asset (be it stock, currency or commodity) at a fixed price before a predetermined date. It is a binding contract with strictly defined terms and properties.

    Still confused? Fine lets use an example to make the whole process a lot easier to figure out.

    Options Trading Explained By Example

    OK you see a house for sale for $250,000 BUT don't have the money just yet but will have the funds in four months time. You can speak to the owner explain the situation and work out a deal to pay them $3000 now with the option to buy the house in four months time for $250,000.

    Now In That Time 2 Things Could Happen

    Scenario 1 - The value of the house could rise to $1.5 million because they find out that Frank Sinatra was born there. Now the owner still has to sell you the house for $250,000 as he sold you the option. This means you could then make an instant profit of $1,247,000 ($1.25 million - $250,000 - $3,000).

    But hold your horses...

    Scenario 2 - You have a survey done and the house is structurally unsound and is full of dry rot and termites. The house is worthless in all but name. Now as you have bought an option you are not under any obligation to actually purchase the house. Instead you just lose the $3,000 the price of the option.

    What Does This All Mean?

    Well there are two points to think about:

    Point 1 - When you buy an option you have the right but not the obligation to buy something. You may just let the option expire and which point the option becomes worthless. At this point all you lose is the original investment.

    Point 2 - An option is just a contract which deals with an underlying asset. This is why an option is called a derivative meaning an option derives its value from something else. In our example the house was the underlying asset but in finance it is usually a stock.

    Conclusion - Options Trading 101

    This explanation is just so that you understand the basic premise of online option trading. There is a lot more to learn but too much information quickly leaves us all confused especially when it comes to financial matters and markets. Consider this article Options Trading 101 a foundation to learn more.


    Article Source: http://EzineArticles.com/5517383
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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."


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