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.
There's no doubt stock option contracts are complex, though they're still very popular as an investment tool because they can be employed to facilitate many different strategies from an investment point of view. In truth, very conservative investment programs as well as those of a far riskier tone can be undertaken solely using stock options trading, though one should always remember that such trading isn't for the weak-kneed. After all, a stock option contract may bring with it the possibility of great reward but it also comes with an equal helping of great risk, most especially when you're a new trader and don't understand the strategy works. In other words, understand stock option contracts like the back of your hand before you begin trading them.
Neophyte investors eager to begin stock options trading should pause for a moment and ensure they're well-trained in the strategy and how option contracts operate before investing, if only to avoid the prospect of stress as well as potential financial ruin. Before sinking any money into a brokerage account, and all brokerages allow their more-experienced clients to trade such options, take an opportunity to closely study stock option basics and how these fascinating derivatives really work. For one, learn just what stock option contract "calls" and "puts" are, because they're very important. Basically, a stock option contract "call" gives you a right but not an obligation to buy the shares contained within that contract at a later date while a "put" gives you a right but not an obligation to sell those shares, also at a later date.
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.
In stock option trading, contracts always contain a "strike price," or the price that the contract's purchaser must pay on a per-share basis to buy or sell the underlying stocks within the contract. For example, you might purchase a 100-share option contract for a $1-per-share premium for a total of $100, with a $10 per share strike price. If you decide to exercise your stock option rights before the contract's expiration date you'll owe the contract writer (normally another investor), $1,000 or $10 per share for 100 shares. If the stock's worth $13 per share, your profit when you immediately turn around and sell will be very nice indeed. If the stock's only worth $9 on the market, simply decline to exercise your option and let the contract die.
Once you've gained a basic understanding of just what a stock option contract is, you should consider taking some time to hang out with and learn from experienced stock options trading professionals. The Internet and the World Wide Web are filled with websites promising in-depth education on stock option contracts as an investment strategy. If you hope to succeed in the practice of trading in stock options investigate any website promising education in stock options fully before committing to it. And always be wary of websites promoting some sort of "autopilot" stock option contract trading software. You can make great wealth, as well as quickly lose your shirt, on stock options and options trading autopilot software holds more peril than promise for newbie investors.
Stock options trading can be exciting, of that there's little doubt, and you can check out the strategy by visiting the NASDAQ -- once known as the "National Association of Securities Dealers, Automated Quotation" -- website to see what it's all about. If you're already up to speed on the basics of stocks and how they're bought and sold and you're ready to jump into their derivatives by trading stock options, check out a few professional trading-type websites beforehand. Keep in mind that stock options and their contracts are complex, so spending some time in close proximity to professional traders, learning from them, is highly advised.
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.
There's no doubt stock option contracts are complex, though they're still very popular as an investment tool because they can be employed to facilitate many different strategies from an investment point of view. In truth, very conservative investment programs as well as those of a far riskier tone can be undertaken solely using stock options trading, though one should always remember that such trading isn't for the weak-kneed. After all, a stock option contract may bring with it the possibility of great reward but it also comes with an equal helping of great risk, most especially when you're a new trader and don't understand the strategy works. In other words, understand stock option contracts like the back of your hand before you begin trading them.
Neophyte investors eager to begin stock options trading should pause for a moment and ensure they're well-trained in the strategy and how option contracts operate before investing, if only to avoid the prospect of stress as well as potential financial ruin. Before sinking any money into a brokerage account, and all brokerages allow their more-experienced clients to trade such options, take an opportunity to closely study stock option basics and how these fascinating derivatives really work. For one, learn just what stock option contract "calls" and "puts" are, because they're very important. Basically, a stock option contract "call" gives you a right but not an obligation to buy the shares contained within that contract at a later date while a "put" gives you a right but not an obligation to sell those shares, also at a later date.
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.
In stock option trading, contracts always contain a "strike price," or the price that the contract's purchaser must pay on a per-share basis to buy or sell the underlying stocks within the contract. For example, you might purchase a 100-share option contract for a $1-per-share premium for a total of $100, with a $10 per share strike price. If you decide to exercise your stock option rights before the contract's expiration date you'll owe the contract writer (normally another investor), $1,000 or $10 per share for 100 shares. If the stock's worth $13 per share, your profit when you immediately turn around and sell will be very nice indeed. If the stock's only worth $9 on the market, simply decline to exercise your option and let the contract die.
Once you've gained a basic understanding of just what a stock option contract is, you should consider taking some time to hang out with and learn from experienced stock options trading professionals. The Internet and the World Wide Web are filled with websites promising in-depth education on stock option contracts as an investment strategy. If you hope to succeed in the practice of trading in stock options investigate any website promising education in stock options fully before committing to it. And always be wary of websites promoting some sort of "autopilot" stock option contract trading software. You can make great wealth, as well as quickly lose your shirt, on stock options and options trading autopilot software holds more peril than promise for newbie investors.
Stock options trading can be exciting, of that there's little doubt, and you can check out the strategy by visiting the NASDAQ -- once known as the "National Association of Securities Dealers, Automated Quotation" -- website to see what it's all about. If you're already up to speed on the basics of stocks and how they're bought and sold and you're ready to jump into their derivatives by trading stock options, check out a few professional trading-type websites beforehand. Keep in mind that stock options and their contracts are complex, so spending some time in close proximity to professional traders, learning from them, is highly advised.
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, Gaining An Understanding Of Stock Options Trading Before Actually Trading Them is available for free reprint.
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