Options Trading- Square One

If you have read previous articles, you certainly have a solid grasp on the idea of buying and selling stocks. While that is all that a large amount of investors understand, options is another investment form. With options, the buyer or seller of an options contract is agreeing to buy or sell 100 shares of a stock at a certain price (the strike price). If the buyer believes that the stock will go up, he or she will purchase a call contract at a strike price that they think the share will rise to. On the other hand, if the buyer believes that the stock will go down, he or she will purchase a put contract at a strike price that they think the share will fall to.

For each contract, a buyer will pay a certain price (premium) that reflects the options intrinsic and extrinsic value. The intrinsic value represents the difference between the share price and the strike price, while the extrinsic value represents how much time is left in the contract and how volatile the stock is. The basic idea of options is to buy contracts when the implied volatility is low and to sell them when it is high. There are dozens of different strategies and types of options, but one must first understand all of the basics before even attempting to comprehend the other things.

Before deciding if options trading is the right form of investment, you must first decide how much risk you want to be exposed to. This is one of the riskiest forms of investing, and has made and lost people tons of money. If you know how to properly trade options, the payout is unbelievable. However, getting to this point requires quite a bit of practice and dedication, and will likely result in lost money. For long term investing and financial security, normal options trading is not always the right strategy. However, forms of it are far less risky and are very important to know. These strategies will be explored and explained in future lessons.