Stock options trading is a way to invest in stocks without actually needing to buy shares of the stock you are investing in. This type of options trading is an investment solution embraced by many investors because it allows you to leverage your money further.
However, there are some risks associated with trading options and it is important that you have a detailed understanding of what options trading means and how it works before you jump into investing.
What is Stock Options Trading?
Simply put, stock options trading means that you buy and sell the right to purchase or sell shares of stock at a certain price. For example, you can buy a call option which would give you the right to purchase a share of stock at a certain price. If the stock was $10, you could buy a call option to buy the stock at $10.50.
If the stock went above $10.50, you would be "in the money" because you could now buy the stock at a lower price than what it is currently selling for. You could also buy a put option, which gives you the right to sell a stock at a certain price. In this case, you would make money if the stock price goes down since you could sell the stock at a higher price than it is currently trading for.
How does Stock Options Trading Work?
Stock options trading can work in different ways. You can even buy stock and sell shares of it if you want to. However, for individuals buying puts and calls, it works in a very simple way. You decide if you think the price of a stock is going to go up or down. If you think it will go up, buy calls. If you think it will go down, buy puts.
The options you buy will have a strike price, which is the price that you expect the stock to go to (the $10.50 in the above example). There will also be an expiration date or a time when your option to buy expires and is no longer good.
How do You make Money on Option Trading?
You make money trading options if the stock performs as you expected it to. If you buy a $10.50 option and the stock goes to $11.00, you could, in theory, exercise your option and buy the stock at $10.50 and then you could hold it or sell it.
Most people, however, will simply sell their option when it goes up without buying the stock. So, instead of buying the stock at $11.00, you would just sell the option to buy it at $10.50. You would make money because you would sell the option to buy at more than what you paid for it.
To be successful and have the best chance of making money, it is important to learn as much as you can. Sites like Simpler Options.com will help you to learn about stock options trading.