Options Trading - Articles

Options trading is a world of adaptation and versatility. It is also complex and does not come without its costs. Disclaimers often spout warning that options trading is not for everyone due to the amount of speculation involved and that there is a substantial risk of loss. This leads some to ignore options trading altogether. However, dismissing this form of investment without understanding its basics is akin to ‘cutting off one’s nose to spite their face’ and can cost an investor more than he or she bargains for in the long run. Successful options trading requires a full understanding of its terminology and its place in the world of trading in stocks and options.

While stocks give a person a small bit of ownership in a company, options themselves are contracts that give a buyer the right (but not the obligation) to buy or sell an underlying asset at a particular price on or before a specific date. To understand further, it would be as if finding a piece of land to buy and putting down $2000 dollars for the option of purchasing the land for $50,000 within 90 days. Should the land be found to have an inexhaustible source of oil, the value of the land would go through the roof- however, the purchase price would remain at $50,000. If the land were found to be the site of an old nuclear waste site and the land deemed useless, the buyer has the option of pulling out at the end of 90 days- yet losing the $2000. Understanding this is understanding the role that speculation plays in options trading.

The two types of options are called calls and puts. A call will give a holder the right to buy an asset at a particular price within a certain period of time. In this case, the buyer is hoping that the stock increases significantly before the option expires. A put gives a holder the right to sell an asset at a particular price within a certain period of time. Here, the buyer hopes the price of the stock will drop before the option expires. Options trading is frequently referred to as a zero-sum game because participants will only gain equal to the other participants’ losses. In short, whether its calls or puts, one will lose while the other ‘wins’. Still, the buyer will not lose more than the original amount paid for the contract.

The thing to know about options trading is that it is generally used as a small part of a much larger gameplan; but because they are so versatile, options trading can be worked into any number of game plans, conservative or high risk. The prospect for reward is higher and requires a much smaller amount of funds than what would be required to manage the same amount of shares in stock. While stocks can trend up or down for an unforeseeable amount of time, options trading gives the opportunity to make money- even it the stock goes stagnant. Online options trading is widely available making it a fairly accessible option to those who, after learning the basics with a broker, can then venture into themselves.

As you can see, options trading has much to offer in the way of potential thanks to its flexibility and is the perfect venue for rounding out a financial portfolio.