Trading Options – Start Today Itself
Posted on Apr 27 2008 | Tagged as: Finance
Do you know what trading options are? Well quite simply, with trading options, the buyer is buying a right to do something from the seller. There are different types of trading options, with stock options and commodity options being the most commonly used. Trading options can be used in any market where the prices of items fluctuate; this will in reality include all markets.
Many people are cunfused as to how options work. The concept is quite simple. If you strongly believe that the share price is going to go up in the future, you would buy a lot of shares. Even though you believe strongly that the price increase will happen, it might not be conceivable at the time to get as many shares as you would like.
In this example, if you had $1000 you could buy only 100 shares. This will mean that you would gain $200 if the price went up as you are hoping. This is not a bad return but you possibly will be wishing to make a bit more than $200 on the information you have.
Trading options allows you to offer a premium to any seller in exchange for an option. As long as the seller thinks the shares price will stay level at $10 over the next 30 days, he may be willing to cut that deal with you. Then you can buy an option to purchase said shares at $10 one month from now.
He believes they will still be worth $10, so he will be seeing a profit of 10 cents a share, and doesn’t even have to own the shares; if you need them, all he has to do is sell them to you in a month at whatever the going price is at that time.
Let’s say the price per share is 10 cents. With the same $1000 you can invest in an option to buy 10,000 shares. If the price increases to $12 per share, you stand to gain an instant $2000. Your option was to buy for $10,000 and you can turn right around and resell them for $12,000. Dealing with options in this case means that you get 100% profit, rather than a measly 20%.
This is the way options trading works in your favor. But you can also be a big loser in this game. Imagine if the shares had dropped to $9.90. This drop is small but if you had bought these shares you would have lost everything instead of just losing $10. Most people don’t know about option trading. This makes it advantageous to take an option tutorial before you begin trading. There are different sources where you can learn option trading.
There are various types of trading options. Stock and commodity options are the most common kinds. Many people are confused as to how options work. The concept is quite simple. If you strongly believe that the share price is going to go up in the future, you would buy a lot of shares. You can pay a premium in order to obtain an option. Because the risks are high and most people are unfamiliar with option trading, an option tutorial can provide you with necessary information and preparation. Many sources are available to learn option trading.
- David Baxwell