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Trading Options Information

Updated on June 13, 2013

In these tough economic times, people are less sure what they should do with their money. Should they be investing in the stock market? Should they be putting money into the bank? Should they be buying real estate? It is hard to know, but one thing is for sure, you have to think hard about the kinds of risks, and returns, you are willing to make. You don’t want to risk your, or your family’s, financial future on a bad investment, but you still want to add value to your bank account.

For some people, the practice of trading options is a great way to invest their money and make a good return on it. Because of the way trading options occurs, it is possible to minimize your risk of losing money. It is also possible, as many people will tell you, to make a large amount of money through trading options. But to do it well, you need to have a good idea of what you are doing. Don’t make the mistake of going into trading options blindly.

Trading options are most familiar way of business through share market
Trading options are most familiar way of business through share market

What Does Trading Options Mean?

Trading options is a term used to describe a kind of agreement in which two parties agree to buy and sell a commodity at some future date at some price. For example, perhaps party A agrees to buy 10 shares of a stock from party B on June 1 at the price of 10.00 a stock. However, because party A is trading options, he does not have to buy the stock if he decides against it. He can opt out of making the buy. The terms can be set between the two parties as to how long party A has to either opt in or opt out of making the buy. This is the expiration date, or expiry, in trading options.

What this option does for party A is to minimize his risk—if the chances are not good that he will profit from buying the asset, or if the price is higher than the return he can get on it, he does not have to purchase anything. All that he loses by letting the trading option expire is the fee he paid party B, usually a broker, to reserve his option. This trading fee is how party B makes some of her money.

The Two Types of Trading Options

Above, we talked about the basic form that trading options takes. But the example given is only one of two different ways trading options can take place. The above scenario is an example of a Call option, the option to buy. There are also what are known as Put options, which in trading options means the option to sell.

Call options are ways of buying commodities that depend on buying that commodity at a price lower than its market value. Party A buys the 10 stocks, for example, at 100.00 when on the open market they are worth 200.00. Party A can thus double his investment. Put trading options, on the other hand, allow you to sell a commodity for more than it is worth on the open market. In this scenario, party A exercises his right to sell his 10 stocks to party B at 100.00 even though they are only worth 75.00. He has thus made 25.00 against the open market.

Trading Options Risks

Many people have made good incomes trading options. Some people have even gotten rich from the practice, making millions of dollars in this way. Unfortunately, some people have also lost a whole lot of money while trading options. This might have been because the market went against these traders, or it might have been that they made unwise decisions to opt on their ability to make Put or Call trades.

The truth is, there are long shot trades and there are the much more sure trades. Sure trades generally make less short term profits but they are less risky to engage in. For many people, making sure trades results in good profits over the long term. Other people, however, prefer to take more risks with their trading options in the hope that the returns, often short term returns, will be larger. This is obviously a risky business, although some people have made a lot of money in this manner.

Either way, trading options is a major part of investing today. If you are looking to invest money, certainly you should consider trading options. Call your broker or financial advisor and ask about this potentially lucrative strategy.

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