Stock Option Trading (Basic Information)

It is no secret that 2008 was a terrible year for most stock investors, and most probably things are going to get worst in the future. The US and the World economy are in a recession that will probably last at least for the rest of 2009. The recession translates into less demand for products sold by companies, which means less profits from companies and then lower stock prices. In very simple terms this is the summary of why the stock market is going lower.

If you are an investor that is loosing money on your stock portfolio, maybe you should take a look at another market that can help, the Option Market. Most investors don't know anything about stock option trading, or stock option strategies, or what is a Call or a Put option. The truth is the Option Market is a sophisticated market mostly used by professional investors. But this does not mean individual investors should stay away from it. There are many firms that will offer you advise on this market (for example www.teofutures.com), others will offer you newsletters and education so you can familiarize with this market.

It is not my intention to explain in full detail about the option market, but these are some of the most important characteristics about stock option trading:

1.- You don't need a lot of money to trade this market. In general terms you should open an account with minimum $10,000 in order to be able to diversify that money into different stock option strategies. Some firms allow you to open with less than that, but based on experience accounts that start with small amounts of money generally loose 100% of their investments.

2.- When trading stock options you can bet that the price of a stock will go higher or lower in the future. This means you still can make money even though the markets are down.

3.- Stock option investing is a fast investment. You don't buy and hold when trading options. You buy and sell, sometimes even in the same day. When purchasing options, usually the more time you keep a position the higher your chances of loosing money.

4.- Trading options is considered risky because you can loose 100% of your investment capital and with some stock option strategies you can even loose more money than your original investment.

5.- Be very careful whom you open an account with. Preferably follow strategies where you only buy Options (Calls or Puts) or spreads. Stay away from firms that will offer you guarantee returns or spectacular profits. As a rule of thumb anything between 0% and 120% return a year is an actual real return to obtain from Option trading. Returns of 500% a year, or turning $15,000 into $200,000 in 18 months, or 100% returns in the first 6 months, it is better to stay away from those offers. Maybe you can obtain those returns but the risks are very high so chances are you most probably loose all your money trying to obtain that type of results.

As mentioned before, stock option trading could be a very good alternative to help investors during these difficult times. Don't invest all your capital in this market and be very careful whom you work with. Specially stay away from guarantee returns.