Options Trading Basics
One of the primary reasons investors choose to get into options trading is the potential to generate profits regardless of whether the market is going up or down.
Another benefit with options trading is that you're not actually buying any assets. You're not required to purchase any stock or currency. You're simply paying a premium for the option to purchase the asset if you choose to exercise that option.
The premium you pay is often quite a lot lower than the actual cost of the stock you're speculating on. This makes option trading very attractive for small investors and they're able to enter the market with only a relatively small investment.
Option Types:
There are two types of option contracts – Call options and Put options. A Call option is where you have the right to buy the underlying stock if you choose to exercise your option. A Put option is where you have the right to sell the underlying stock if you choose to exercise your optional right.
The options contracts themselves can be on-sold to other investors, which is where successful options traders generate their profits.
Types of Options Trading:
A Covered Call options contract is when an investor already owns a parcel of stocks and wants to give someone the option to buy them at a fixed price at a point in the future. The stock owner writes an options contract and an investor buys the option contract. This allows the stock owner to receive a premium for writing a covered call contract.
During the contract period, the price of the stocks goes up. The investor has two choices – he can sell the option contract to another investor and keep the profit or he can exercise his option and purchase the stock outright at the discounted price.
A Naked Option trade is the more attractive investment vehicle for many small investors. This is where you simply buy or sell an options contract without ever buying or owning any stock of your own. Your sole aim as an options trader is to buy options contracts and then trade them at a profit.
Questions and Answers
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