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Tags: finance, stocks, options trading for beginners
 When we invest in portfolios it usually includes investments in mutual funds, stocks, and/or bonds. But there are more investment options available. Options trading is another strategy wherein one trades in securities called options. This article will discuss options trading for beginners so you will get an understanding of the basics of this opportunity.
Options trading has a number of advantages over other investment instruments. It gives an investor the flexibility to place bets on very specific market outcomes. However, this makes options trading a very risky venture for the uneducated trader. While options trading can give you very large returns within a small amount of time, it can also lose you the same amount if you are not careful.
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Simply stated an option is a contract that gives one party the right to buy or sell an underlying asset. It is called an option because there is no obligation to go ahead with the transaction. There are typically two types of options—calls and puts. The first type, called a call, gives a holder the right to purchase an asset at a set exercise price within a specific period of time, ending in the maturity date.
It is their hope that the asset would increase in value beyond the purchase amount so they can make a profit. To illustrate Brian buys a call contract from Steve to buy 10 shares of XYZ Corp on April 30th for the exercise or strike price of $100 each. Should the market value of XYZ Corp trade above $100 on April 30th, Brian can then exercise his right to buy from Steve, who would be obligated to sell to Brian at the exercise price regardless of the market.
Brian would then make a profit once he sells at market. The second type, called a put, gives a holder the right to sell an asset at a set exercise price within a specific period of time, ending in the maturity date. It is their hope that the asset would decrease in value lower than their selling amount so they can make a profit.
Using the same example above, Brian buys a put contract from Steve to sell to Steve 10 shares of XYZ Corp on April 30th for $100 each. Should the value of XYZ Corp trade below $100 on April 30th, Brian can then exercise his right to sell to Steve who would be obligated to buy from Brian at the exercise price regardless of the market.
Brian would buy the shares he will sell to Steve at the lower market price, thereby making a profit. There are two main styles used in options trading that refers to whether or not the contract can be exercised before the expiry or maturity date. The European style contract can only be exercised at the maturity date.
The American style contract on the other hand, allows a holder to exercise his rights at anytime before the maturity date. The two main reasons why an investor would use this type of trading is either to speculate or to hedge. Speculating is the betting on the movement of a security.
In options trading you aren't limited to making a profit only when the market goes up but also when the market goes down, sideways or in spirals. This is where you can make the most money but also where you get exposed to the most risk. When you’re hedging you’re making an investment to reduce the risk of an adverse price movement in an asset you’re holding.
Normally, you take an offsetting position in a related security. Think of it as an insurance policy for your investment. Options trading isn’t for all investors. They are sophisticated trading tools that can be dangerous if you don't educate yourself before using them but they can also be a money maker given the right circumstances.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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