What Is Options Trading?

If you've been trading stocks for a while and want to do something a little more speculative, then maybe options trading is for you. At a very basic level, an option traded on the stock exchange means 'a right'. So an options trade involves giving someone the right to buy or sell a certain stock at a certain price by a specific time. If you buy an option to purchase securities, then it's called a call option. If the option you buy is to sell securities, then it's referred to as a put option. Some traders even go so far as to purchase both calls and puts on the same stock, with agreed prices and by an agreed date, then it can be called a double option, or sometimes a put and call option.

Confused yet? The hardest part of options trading is understanding all the jargon. But once you understand all the technical names for various instruments, you'll soon discover that what you really need to know is which way you think the stock price is going to move in the near future. That's it. Once you have an idea what's going to happen, then all you need to do is use the right option trade to benefit. For example, if you expect a stock's price is about to rise, then you would purchase a call option on that stock. This would enable you to buy now at a lower price, and sell in the future at a higher price. This trade works if the stock's price rises, but if it doesn't, you could be left holding a bunch of worthless options. When it comes to put options, it works the opposite way - you buy put options if you think the stock's price is going to fall. In both cases, you secure your right or option by paying a premium to the person selling the option.

The premium you pay is known as the option money. If the market moves against you, then the only money you will lose is the option money you've paid. So the good thing in options trading is that your losses always have a known ceiling. So if you don't want to risk large amounts of capital, but still want to use a smaller amount of money to gain from price variations, options trading can be the answer. The bottom line, though, is that options trading is something that you should only dabble in once you've spent time learning about the stock market, and if you are confident that you can make decisions calmly when the pressure is on.

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