If you want to make money in the financial market scene, you may want to get into trading. However, terms such as foreign exchanges, stocks, and bonds can make trading overwhelming and intimidating. So let’s start slow. One of the many things you can pursue in trading is something called options trading. Options trading is easy to understand with the right training and guidance. This article will explain the basics you need to learn about this concept so you can trade in no time at all.
Options Trading: What Is It?
It might help to know what options trading is before getting into the craft. When you say options trading, it involves selling and buying options contracts on public exchanges. This is akin to stock trading, where traders make profits through selling and buying stocks at varying prices. In the case of options trading, traders make profits by purchasing option contracts and selling them at much higher prices. Like stock traders, options traders can actually take short positions on options they think may go down in value.
Options Trading for Beginners: What Do You Need to Know?
Options trading can be an overwhelming concept. Thankfully, a lot of online sources such as Phil’s Stock World can actually provide you with in-depth information and advice when it comes to options trading.
Here are just some of the things that you need to know options trading:
- Options are flexible assets: If you’ve ever bought stock, then you’re pretty much set to buy options. You can purchase options that you expect to either go up or go down in value. You can purchase option contracts by simply choosing how many of a certain contract you want and then placing a buy through a broker. You can now sell or exercise options that go up in value. Options are flexible; you can buy them almost immediately and sell them just as fast.
- Selling and writing options are simple to do: There exist two ways to sell options. First, if you want to cut your losses or realize your profits, then you can sell bought contracts through a sell to close order. You can also “write” options, where you open a short position and sell those options instead. “Writing” means having to write new contracts that can be sold in the market and also taking on the obligation that’s stated in the contract. Hence, you have to buy the underlying security or sell the underlying security from the holders at the strike price (if put or call, respectively).
- Exercising your options is another opportunity to make a profit: A lot of options traders tend to just write, sell, or buy options to make a profit. You can, however, also exercise options if you wish. This simply means executing what’s said on the contract. This is helpful, especially if you have a particular reason for buying a certain contract.
- Create option spreads to increase your chances of making profit: While buying and selling options can make you money, it’s the spreads that make options trading very profitable. This means entering a position on two or more options that rely on the same security. An example of this is purchasing an option and writing contracts on the same stock. This is used by a lot of traders to minimize risks with their positions or reduce the financial “hurt” when taking a particular position.
The Bottom Line: Options Trading Can Be for You
With the above in mind, you now have a better understanding of how options trading works. Whether or not it’s for you has a lot to do with the risks you’re willing to take, the budget you have, and how much of the market you’re willing to study in order to make proper choices. Remember, like any methods of trading, it’s not enough to know what options trading is; it helps to also have an in-depth understanding of how your particular market works across all levels in order to make the right investment decisions.