There's a figurative universe worth of investment securities and trading strategies to be found on the world's stock markets, and their complexity ranges from "pretty easy" all the way up to "extremely complex." The basics of trading stocks and bonds, for example, are generally easy to conceptualize, and they're just as generally easy to trade. But there are an endless number of other ways to trade in stocks, including trading their derivatives, which are commonly known as stock options. Always keep in mind the complexity of stock options and how they're traded, though, as well as the need to fully understand just how those trades work before you undertake the strategy, because stock options trading itself, while lucrative, can also be financially risky when they're traded incorrectly.
In the financial world, stock options are known as derivatives because they derive their existence from the actual stocks that serve as their foundation and reason for existence. In a stock option contract, you're not actually buying or selling the underlying stocks found within the contract, at least initially. Rather, what you're purchasing with a stock option contract is a future right but not an obligation to buy or sell the stocks, usually bundled in 100-share packets, contained within the contract. The stock options trading world is filled with countless options contracts, most of which aren't even exercised, to tell the truth.
Though complex, stock option contracts are a popular trading tool because they can be used in a wide variety of investment strategies. Conservative as well as high-risk strategies and everything in between all lend themselves well to the intelligent use of stock options trading, but never forget that trading stock options isn't for the faint of heart. With potentially great reward, and stock options can bring lucrative financial payoff, comes potentially great risk, especially if you don't understand stock options, their contracts and how they're traded. Thoroughly understand stock options contracts before trading them, in other words.
Most neophyte investors are strongly advised to learn all they can about how stock options trading works before they take up the investment strategy precisely because financial ruin awaits if they don't do it correctly. Before funding a stock brokerage account -- and all reputable stock brokerages offer clients the ability to trade in stock option contracts -- read up on the basics of stocks and their derivative options. Understand, as well, what a stock option "call" is versus its opposite, the stock option "put." In stock options, a "call" is a right to buy an agreed-upon number of stocks in a contract, while a "put" is a right to sell an option contract's shares.
When it comes to stock options trading, contract fees or "premiums" per underlying share in the option contract are another key concept. A stock option contract premium is the price per share that you'll pay to obtain the option to buy or sell those shares in the future, and it's also your total cost to obtain that contract unless and until you exercise your option rights. When it comes to a stock option contract's premiums or fees, their costs vary by the contract. For instance, there might be a $1 per share premium attached to each underlying share within the 100-share block within the contract, or a $100 total premium at $1x100 shares to gain the right to purchase or sell the stock before the contract's expiration date, or expiry.
When it comes to stock options trading, you'll always find a "strike price" attached to the contract's language, with that strike price being the price per share you'll pay to gain those stocks if you exercise your option rights. For instance, your purchase of a 100-share stock option contract might cost you a $1 per share premium, or $100, and then a $10 per share strike price if you really do exercise your call or put option. When you exercise your stock option contract rights you'll be on the hook for the $10 per share strike price, meaning $1,000 to the contract's writer (at $10x100 shares = $,1000), but if the stock's actually worth $13 per share your profit when you sell those shares will be high. If the stock found within your stock option contract is only worth $9 on the markets, and your strike price is $10 to obtain that stock, you'd generally just let the contract expire and decline to exercise your option rights.
Once you've gained an easy familiarity with just how stock option contracts work, always take a bit more time to learn from those experienced at trading them. There are many different websites on the Internet that make a ton of promises when it comes to stock options trading education, especially when it comes to using them as an investment strategy. However, if you really want to ensure your success in trading stock options you need to closely examine any website making promises related to turning you into a super-trader or the like before handing over any money in hopes of becoming that sort of trader. You also need to beware any stock options website promoting some sort of "autopilot" automated stock option contract trading software. While it's true that there's a lot of money to be made in trading stocks and their options you can see just as much money fly away by trusting only to an automated trading software package.
For hopeful stock options trading investors interested in checking out just what the excitement is when it comes to such options, the NASDAQ -- which was once known as the "National Association of Securities Dealers, Automated Quotation" -- website offers a promising start. Those already familiar with the basics of buying and selling stocks themselves and who are also ready to get into derivatives through trading of stock option contracts can check out several professional options trading websites. Because trading stock option contracts is indeed complex, spending much time hanging out with and discussing such options with trading professionals is advised as well.
In the financial world, stock options are known as derivatives because they derive their existence from the actual stocks that serve as their foundation and reason for existence. In a stock option contract, you're not actually buying or selling the underlying stocks found within the contract, at least initially. Rather, what you're purchasing with a stock option contract is a future right but not an obligation to buy or sell the stocks, usually bundled in 100-share packets, contained within the contract. The stock options trading world is filled with countless options contracts, most of which aren't even exercised, to tell the truth.
Though complex, stock option contracts are a popular trading tool because they can be used in a wide variety of investment strategies. Conservative as well as high-risk strategies and everything in between all lend themselves well to the intelligent use of stock options trading, but never forget that trading stock options isn't for the faint of heart. With potentially great reward, and stock options can bring lucrative financial payoff, comes potentially great risk, especially if you don't understand stock options, their contracts and how they're traded. Thoroughly understand stock options contracts before trading them, in other words.
Most neophyte investors are strongly advised to learn all they can about how stock options trading works before they take up the investment strategy precisely because financial ruin awaits if they don't do it correctly. Before funding a stock brokerage account -- and all reputable stock brokerages offer clients the ability to trade in stock option contracts -- read up on the basics of stocks and their derivative options. Understand, as well, what a stock option "call" is versus its opposite, the stock option "put." In stock options, a "call" is a right to buy an agreed-upon number of stocks in a contract, while a "put" is a right to sell an option contract's shares.
When it comes to stock options trading, contract fees or "premiums" per underlying share in the option contract are another key concept. A stock option contract premium is the price per share that you'll pay to obtain the option to buy or sell those shares in the future, and it's also your total cost to obtain that contract unless and until you exercise your option rights. When it comes to a stock option contract's premiums or fees, their costs vary by the contract. For instance, there might be a $1 per share premium attached to each underlying share within the 100-share block within the contract, or a $100 total premium at $1x100 shares to gain the right to purchase or sell the stock before the contract's expiration date, or expiry.
When it comes to stock options trading, you'll always find a "strike price" attached to the contract's language, with that strike price being the price per share you'll pay to gain those stocks if you exercise your option rights. For instance, your purchase of a 100-share stock option contract might cost you a $1 per share premium, or $100, and then a $10 per share strike price if you really do exercise your call or put option. When you exercise your stock option contract rights you'll be on the hook for the $10 per share strike price, meaning $1,000 to the contract's writer (at $10x100 shares = $,1000), but if the stock's actually worth $13 per share your profit when you sell those shares will be high. If the stock found within your stock option contract is only worth $9 on the markets, and your strike price is $10 to obtain that stock, you'd generally just let the contract expire and decline to exercise your option rights.
Once you've gained an easy familiarity with just how stock option contracts work, always take a bit more time to learn from those experienced at trading them. There are many different websites on the Internet that make a ton of promises when it comes to stock options trading education, especially when it comes to using them as an investment strategy. However, if you really want to ensure your success in trading stock options you need to closely examine any website making promises related to turning you into a super-trader or the like before handing over any money in hopes of becoming that sort of trader. You also need to beware any stock options website promoting some sort of "autopilot" automated stock option contract trading software. While it's true that there's a lot of money to be made in trading stocks and their options you can see just as much money fly away by trusting only to an automated trading software package.
For hopeful stock options trading investors interested in checking out just what the excitement is when it comes to such options, the NASDAQ -- which was once known as the "National Association of Securities Dealers, Automated Quotation" -- website offers a promising start. Those already familiar with the basics of buying and selling stocks themselves and who are also ready to get into derivatives through trading of stock option contracts can check out several professional options trading websites. Because trading stock option contracts is indeed complex, spending much time hanging out with and discussing such options with trading professionals is advised as well.
About the Author:
Before you even think about trading stock option contracts, make sure you check out the Option Millionaires website and its tutorials on stock options trading as well as its active stock options trader forums.. This article, Stock Options Trading As A Potentially Lucrative Investment Strategy is available for free reprint.
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