Options trading is a great way to allow your stocks to make more money for you, or to invest and get more leverage for your funds. However, it is also important to be aware that there are some significant risks associated with options trading as well. If you understand the risks, take steps to protect yourself, and invest wisely, options trading can be a great choice for you.
What does Options Trading Mean?
Options trading means that you buy or sell the option to purchase a stock (or other commodity) at a given price. For example, if a stock was currently selling at $10, you could buy an option to purchase the stock for $11.00. If the stock then went up to $11.50, you could exercise your option to buy the stock at $11.00 and automatically make .50 cents on each share.
When you trade options, you do not actually have to buy the stock. If you owned the option to buy an $11.00 stock at $10.50, you could sell your option to another buyer instead of actually purchasing the stock. Your option, which is "in the money" would be worth more than you paid for it.
How does Options Trading Work?
There are a lot of different ways that you can trade options. One choice that you have is to buy a stock and then sell options with that stock. If you owned an $11.00 stock, for example, you could sell to someone else the option to buy it at $11.50. If the stock went to $11.50, then the other buyer could exercise the option and buy the stock from you. You would make the profit of .50 cents per share of stock, and you would also make the money that you earned from selling the option.
Even if the stock did not go up to $11.50, you would still make money because you would have the funds you were paid to buy the expired option.
Another choice is to simply buy and sell options without actually owning the underlying stock. This can be a bit riskier as there is a chance that the money you invest could be lost.
Risks and Benefits of Options Trading
Options trading has lots of benefits, including the fact that you can buy an option to buy a high-priced stock that you believe will go up, even if you do not have sufficient funds to buy shares of the stock. You can make your money stretch much farther when investing in options.
Downsides exist as well though. If you buy an option to buy a stock at $10.00 and the price never goes up to that $10 mark, you would lose all of your money if you couldn't sell the option before it expires.
Because there are risks and benefits, it is important to learn as much as you can before you start trading options. Visit SimplerOptions.com to learn more about options trading or to fill in the gaps of your options education.