What Exactly Is Options Trading?

Fri, Oct 31, 2008

Option trading is the game of the rich.

Investors LOVE option trading because they can employ LEVERAGE, which means they are able to control a large amount of shares with a small fraction of the cost. (100 shares per option)

It also allows you to MAKE MONEY no matter where the market goes, up,down or even sideways.

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Before I talk about option contracts, there are few jargons you need to know.

1) STRIKE PRICE is the price where you exercise your contract.

2) EXPIRATION is the date your contract expires.

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Now lets begin…

There are 2 type of option contracts that you must know.

1) Call option

Call option gives you the right to BUY fixed quantity of stocks at a predetermined price on or before the expiration date.

EXAMPLE: You get call option when you expect the stock price to RISE above the strike price, at which point you may choose to exercise the option.

When you exercise a call option, it means you simultaneously purchase the shares at the strike price and immediately selling them at the now higher market price.

That is here you MAKE MONEY!

2) Put Option

Put option gives you the right to SELL fixed quantity of stocks at a predetermined price on or before expiration date.

EXAMPLE: You get put option when you expect the stock price to GO BELOW the strike price, at which point you may choose to exercise the option.

When you exercise a put option, it means you simultaneously SELL the shares at the strike price which is then higher than the stock price today.

Hope, my explanation enlightens those who wants to know more on what OPTIONS TRADING is all about!

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This post was written by:

Helmi Hakim - who has written 294 posts on The Official Helmi Hakim Website.

A certified financial associate, Helmi Hakim has won praise for his patience, perseverance and practicality when solving his clients' financial concerns. For more information on how you can manage your finances better, contact Helmi Hakim at 96520134.

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