Options trading and explaination


When most people think of investment, they think of buying stocks on the stock market, and many are probably completely unaware of terms like options trading. Buying stocks and holding on to them with a view to making long term gains is after all, one of the more common investment strategies.

It's also a perfectly sensible to way invest, providing you have some idea about which stocks you should be buying or use a broker that can offer you advice and guidance on such matters. These days, many investors are choosing options trading and explaination use a more active investment style in order to try and make more immediate returns.

Thanks to the range of online brokers that enable options trading and explaination to make transactions on the stock exchanges options trading and explaination just a few clicks of their mouse, it's relatively straightforward for investors to be more active if they wish to. There are many people that trade online on either a part time or a full time basis; buying and selling regularly to try and options trading and explaination advantage of shorter term price fluctuations and often holding on to their purchases for just a few weeks or days, or even just a couple of hours.

There are plenty of financial instruments that can be actively traded. Options, in particular have proved to be very popular among traders and options trading is becoming more and more common. On this page we have provided some useful information on what is involved in options trading and how it works.

In very simple terms options trading involves buying and selling options contracts on the public exchanges and, broadly speaking, it's very similar to stock trading. Whereas stock traders aim to make profits through buying stocks and selling them at a higher price, options traders can make profits through buying options contracts and selling them at a higher price. Also, in the same way that stock traders can take a short position on stock that they believe will go down in value, options traders can do the same with options contracts.

In practice however, this form of trading is far more versatile than stock trading. For one thing, the fact that options contracts can be based on wide variety of underlying securities means that there is plenty of scope when it comes to deciding how and where to invest.

Traders can use options to speculate on the price movement of individual stocks, indices, foreign currencies, and commodities among other things and this obviously presents far more opportunities for potential profits. The real versatility, though, is in the various options types that can be traded and the range of different orders that can be placed. When trading stocks you basically have two main ways of making money, through taking either a options trading and explaination position or a short position on a specific stock.

If you expected a particular stock to go up in value, then you would take a long position by buying that stock with a view to selling it later at a higher price. Options trading and explaination you expected a particular stock to go down in value, options trading and explaination you would take a options trading and explaination position by short selling that stock with a hope to buying it back later at a lower price. In options trading, there's more choice in the way trades can be executed and many more ways to make money.

It should be made clear that options options trading and explaination is a much more complicated subject than stock trading and the whole concept of what is involved can seem very daunting to beginners.

There is certainly a lot you should learn before you actually get started and invest your money. With that being said, options trading and explaination, most of the fundamentals aren't actually that difficult to comprehend.

Once you have grasped the basics, it becomes much easier to understand exactly what options trading is all about. Buying an options contract is in practice no different to buying stock.

You are basically taking a long position on that option, expecting it to go up in value. You can buy options contracts by simply choosing exactly what you wish to buy and how many, and then placing a buy to open order with a broker. This order was named as such because you options trading and explaination opening a position through buying options.

If your options do go up in value, then you can either sell them or exercise your option depending on what suits you best. We provide more information on selling and exercising options later. One of the big advantages of options contracts is that you can buy them in situations when you expect the underlying asset to go up in value and also in situations when you expect the underlying asset to go down.

If you were expecting an underlying asset options trading and explaination go up in value, then you would buy call options, which gives you the right to buy the underlying asset at a fixed price. If you were expecting an underlying asset to go down options trading and explaination value, then you options trading and explaination buy put options, which gives you the right to sell the underlying asset at a fixed price.

This is just one example of the flexibility on these contracts; there are several more. If you have previously opened a short position on options contracts by writing them, then you can also buy those contracts back to close options trading and explaination position.

To close a position by buying contracts you would place a buy to close order with your broker. There are basically two options trading and explaination in which you can sell options contracts.

First, if you have previously bought contracts and wish to realize your profits, or cut your losses, then you would sell them by placing a sell to close order.

The order is named as such because you are closing your position by selling options contracts. You would usually use that order if the options you owned had gone up in value and you wanted to take your profits at that point, or if the options you owned had fallen in value and you wanted to exit your position before incurring any other losses.

The other way you can options trading and explaination options is by opening a short position and short selling them. This is also known as writing options, because the process actually involves you writing new contracts to be sold in the market. When you do this you are taking on the obligation in the contract i. Writing options is done by using the sell to open order, and you would receive a payment at the time of placing such an order.

This is generally riskier than trading through buying and then selling, but there are profits to be made if you know what you are doing. You would usually place such options trading and explaination order if you believed the relevant underlying security would not move in such a way that the holder would be able to exercise their option for a profit.

For example, if you believed that a particular stock was going to either remain static or fall in value, then you could choose to write and sell call options based on that stock. You would be liable to potential losses if the stock did go up in value, but if it failed to do so by the time the options expired options trading and explaination would keep the payment you received for writing them.

Options traders tend to make their profits through the buying, selling, and writing of options rather than ever actually exercising them. However, depending on the strategies you are using and the reasons you have bought certain contracts, there may be occasions when you choose to exercise your options to buy or sell the underlying security.

The simple fact that you can potentially make money out of exercising as options trading and explaination as buying and selling them further serves to illustrate just how much flexibility and versatility this form of trading offers. What really makes trading options such an interesting way to invest is the ability to create options spreads. You can certainly make money trading by buying options and then selling them if you make a profit, but it's the spreads that are the seriously powerful tools in trading.

A spread is quite simply when you enter a position on two or more options contracts based on the same underlying security; for example, buying options on a specific stock and also writing options trading and explaination on the same stock. There are many different types of spreads that you can create, and they can be used for many different reasons. Most commonly, they are used to either limit the risk involved with taking a position or reducing the financial outlay required with taking a position.

Most options trading strategies involve the use of spreads. Some strategies can be very complicated, but there are also a number of fairly basic strategies that are easy to understand. You can read more about all the different types of spreads here. There are actually a number of benefits this form of trading offers, plus the versatility that we have referred to above. It's continuing to grow in popularity, not just with professional traders but also with more casual traders as well.

To find out just what it is that makes it so appealing, please read the next page in this section — Why Trade Options? What is Options Trading? Section Contents Quick Links. What Does Options Trading Involve?

Below we explain in more detail all the various processes involved. Buying Options Buying an options contract is in practice no different to buying stock. Exercising Options Options traders tend to make their profits through the buying, selling, and writing of options rather than ever actually exercising them.

Options Spreads What really makes trading options such an interesting way to invest is the ability to create options spreads. Benefits of Trading Options There are actually a number of benefits this form of trading offers, plus the versatility that we have referred to above. Read Review Visit Broker.

Option trading can be a options trading and explaination way to make money, offering strategies for traders from beginner level to the most advanced.

Before we can begin to make it work, though, there a few basic things that we need to understand. A listed stock option must be one of only two things:. It sounds simple with only two elements, but then so do the numbers 0 and 1. The exchanges specify the standardized terms of every option contract. There are several exchanges, and all are coordinated through a central clearing house. That asset is almost always shares of the stock of a given company, or of an exchange-traded fund.

For example, the underlying asset might be shares of Apple stock. For each underlying assetoptions trading and explaination are many different options available.

Above is a small sample of the options for Apple options trading and explaination for just one expiration date, Options trading and explaination 16, The Options trading and explaination column in the center of the chain lists the strike prices that are options trading and explaination. The columns to the left of the Strike column refer to call options, while those on the right refer to puts.

In this list that right is good through December Once you have paid for a call option you can buy one for the price shown in the Ask column, timesyou then have the right buy the stock at that price no matter what the market price of Apple stock is at some future date between now and expiration. This will allow you to make money if Apple stock goes up while risking only a small fraction of the stock price. If you own the stock, this is like a guaranteed stop-loss.

Besides the options listed above that expire in December, there are other expiration dates available as shown below:. The expiration dates above range from November 11,which was just 2 days away when this article was written; to January 18,more than two years away. For every one of those expiration dates there is a list of available option strike prices that is similar to the options trading and explaination in the first diagram above, altogether there are over options for Apple stock.

Once you understand the world of options, all these possibilities are open. Stay tuned for future articles. If this piques your interest, check with your local center on option classes offered in your area. Disclaimer This newsletter is written for educational purposes only.

By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever.

Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader.

The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for options trading and explaination reading only, for all else, please obtain permission.