Basically, options are legally binding contracts that allow traders to purchase stocks at set prices within a certain period of time. The right to buy though does not obligate the trader to fulfil the transaction.
Option trading offers a very profitable way of earning money, but you must first fully understand all the underlying aspects, factors and principles included. In simple words, option trading can be extremely complicated without the right knowledge. Thus, in order to start earning through option trading, you must first start being acquainted with the basics of options trading.
How to Start – Call Option and Put Option
The easiest means of getting started with options trading is by opening an option trading account with your broker or you can request an option trading qualification to be added to your existing account. The next move is to practice the processes like buying calls for stocks you deem will increase or buying puts for stocks that have the tendency to decrease.
More Option Trading Strategies
In you aim to learn to trade options, you will also have to start learning about the more complex strategies used. In addition, you can start moving into these strategies once you have been highly familiarised with the basic calls and puts.
To learn to trade options is to strive to be a winner
Image attributed to Wikimedia Lenore Edman
Once you are familiarised with the call and put options, then you can start moving to the more complicated strategies used in option trading.
Among the strategies you need to know include the styles of options contracts; American and European styles. The difference between the two is not actually geographic but rather in the way they are traded and the expirations. American style option can be exercised at any time within the purchase time until the expiration date while European style option can be used on the expiration date only.
Long and Short
Just like in futures markets, long and short in options markets pertain to the purchasing and selling of contract. Unlike in the futures markets though, the long and short in options do not pertain to the trade direction. For instance, if futures is entered through a contract purchase, the trade is then called a long trade wherein the trader will want for the price to increase. With options, on the other hand, even if the trade is entered by purchasing a put option contract, it is still considered as a long trade – even if the trader wishes for the price to significantly go down.
Aside from the strategies and styles of options used, it is also beneficial to know the risks involved in options trading. By being able to understand the risks, you can be a better trader in this highly lucrative world.
Risks in options trading include the failure to recognise the best investment opportunities. When this happens, losses are inevitable. Therefore, careful selection of opportunities for investment is one sure way of limiting your risks. This means, you need to keep your objective, and that is to win and not to lose.