When it comes to trading, there is so much to learn. There are a number of markets that you can put your money to work in. There are even more strategies to choose from, and there is no one-size-fits-all approach to trading. The key is to know as much as you can about the many types and methods of trading and put together the strategy that is best for you. This article is aimed at introducing another of the many facets of trading to your awareness.
As mentioned before, there is a myriad of ways to trade. Ironically, one of the many options you have for trading is options! Trading options is much like trading stock, and buying options can actually help you to determine whether or not you actually want to buy that stock. Just like any aspect of trading, you can’t learn all that there is to know about trading options overnight. But, if you’re interested in learning more about options, then keep reading to learn the basics of trading options.
What is an option?
An option is like a stock, but it’s not one. An option is a contract to purchase or sell a stock at an agreed upon time and at an agreed upon price. When you purchase the contract, you have several ways to manage it.
The options themselves are known as call and put. A call option is an option to buy an asset, and a put option is an option to sell an asset. Below is a short example choices that you can make with call options.
At any time before the date on the contract, you can either sell the option or exercise it. You make this decision based on what you believe will happen with the stock. If you see that the stock is rising in price and you believe it will continue to do so, then it would be to your advantage to sell the option to someone else who can exercise it later.
If the stock value rises above the price you agreed upon, you can also purchase it at the agreed upon price and either hold it or sell it for a profit. However, you are not actually required to make the purchase. You can hold the option until it expires, and then you will be free of any financial obligation.
Types of options
There are many types of options based on the asset underlying the contract, the style of the contract itself, and the duration of the option on the contract. The asset that options are most commonly utilized on is stocks. However, they are also used with currency, futures, commodities, and index trades.
As far as strategies for options, the binary options strategy is one that has really gained steam over the past few years. They are popular because they have a loss cap, but they have a profit cap as well. While it does mean that you won’t win big on a trade, it also prevents big losses.
If you think that the price of an asset will have risen by the expiration time, then you purchase the call option on it. If you think that the price of the asset will fall, then you purchase the put option. If you start seeing that the price is going in the opposite direction that you predicted, you have the freedom to sell your option-if you can find a buyer, that is. Once the contract expires, you will either win the set sum or lose what you invested, like a bet.
Trading options is great for beginners because options cost less than actual assets. Also, they give you an opportunity to get your feet wet before jumping all the way into the dicey waters of trading. There is definitely a lot more to learn about trading options, but at least now you have a basic understanding of what they are. Happy trading!