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Learning the Basics of Stock Option Trading

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  • Learning the Basics of Stock Option Trading

    When someone first becomes interested in stock market trading, it can be very overwhelming to sort through all of the new information. Between buying and selling, stocks and bonds and a various other terms, it can seem like a completely different language. Stock option trading is just another derivative of stock market trading, and before getting involved, it is important to understand the fundamentals of trading options.

    With stock option trading, someone can put down a payment on a stock and then decide in a predetermined amount of time if they would like to purchase it for a price that is agreed upon in advance. For example, someone can purchase an option to buy shares of stock XYZ for $20 a share in three months. In three months, the price of XYZ stock may have risen to $25, but that person will still be able to purchase it for $20.

    When options trading, whether with a broker or trading options online, there is some key lingo that someone must be familiar with in stock market trading to be successful. When someone refers to a premium, they are talking about the amount that is paid for the option. Strike price refers to the amount that someone agrees to pay for the stock at a later time. The stock in question is generally referenced as an underlying stock.

    One popular use for trading options is hedging an investment. Imagine that someone is interested in stock market trading and want to purchase a particular stock but there is some uncertainty as to how successful the stock will be. If the stock may go down, they could use options trading instead and purchase a put option, which will be worth more as the price of the stock drops. This reduces their profits slightly, but it does provide a safety net in case the stock does not do well.

    Another benefit of trading options is that investors can trade them for an immediate profit. Once again, imagine someone purchasing an option to buy a stock for $30 in six months. In six months time, the stock may be worth $40. The investor can purchase the stock for $30 and immediately sell it for $40, making a ten-dollar profit on each share.

    These details just scratch the surface about the fundamentals of stock options and what goes into stock option trading. While learning about options trading is a great start, potential investors should be sure they understand all of the intricacies about trading options before they get involved. Once they do, they will be in great shape to enter the exciting world of stock option trading.


    Article Source: http://EzineArticles.com/4520762
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