In layman’s term, options pertain to contracts that give the bearer the right, but not necessarily the obligation, to either buy or sell an amount of some underlying asset at a pre-determined price on or before a specified date.
Options are another asset class akin to stocks, bonds, mutual funds, and Exchange Traded Fund (ETF). And just like these asset classes, options can be purchased. Primarily, investors use options trading as a way to boost their trading portfolio. When trading options, a trader can grow his income or use it as protection or even leverage.
Investors typically use options as a strategic way to sort of “insure” themselves from the potential market downslide. In this case, options become a Hedge (an investment to reduce the risk of adverse price movements in an asset) to limit traders’ losses.
However, options trading (no different from the other trading forms) also entail certain risks. So before plunging to the market to trade options for the sake of generating additional income, learn the facets of opportunities to employ effective trade strategies and decisions.
Options as Derivatives – options are part of the group of securities called Derivatives. A derivative price is derived from the cost of another thing. So options are derivatives of financial securities. Derivatives can be in the form of calls, puts, futures, forwards, swaps, etc.
Call and Put Options – A ‘call option’ gives the holder the right to buy a stock while a ‘put option’ gives the holder the right to sell a stock.
There are specific options trading strategies that beginners should be familiar with to profit. Here are some of them: straddles and strangles covered call, and selling iron condors
In the next part, let us have further simplification of options trading for beginners to acquire a broader understanding of how it works.
Options trading for dummies
Options can be played using four options: buy calls, sell calls, buy puts, and sell puts. You are in a prolonged position when you buy stocks. Once you buy a call option, it can also give you that same long position in the underlying stock. Short-selling a stock, on the other hand, gives you a short position. When you sell an open call, it gives you a short position in the underlying stock.
When you buy a put option, it will yield you a short position in the underlying stock while selling an open call will place you long in the underlying stock. These four scenarios in options trading make an urgent call to the result of your trade, so keep it in the system as much as possible.
Those who buy options are called holders, while traders who sell options are called writers of options.
Now, to start trading options, you also need to look for a broker and sign up an account with them to link you to the options market. Options trading platforms are of different formats and styles, so you must have a construct of what you will be looking for in an options trading platform.
The same with forex trading, TD Ameritrade is a good option trading broker. Trades at TD Ameritrade are around $6.95 per trade plus $0.75 per contract. TD Ameritrade’s platform includes a wide range of resources for beginners that will help them employ trade strategies.
Trading options may be confusing at first, but once learned, it can become a steady source of added income for you. A stock option contract represents 100 shares of the underlying stock, but options may be written on any underlying asset. Options trading can propel you to a broader investment portfolio realm coupled with strategies and a good platform.