In a volatile economy, if you know what you are doing, options trading can be a great option to make money for a small investor. Options are purchased, with no obligation to take action on the options. It is important to remember, thought, that options involve some risk and that there is a binding contract with any options trading.
Options are basically contracts that give the purchaser the right to buy or sell a stock or other security for a fixed amount within a given time period. In the United States, one option is equal to 100 of its underlying shares. It is advised that if you are a beginner, looking into options, you should take an
option trading course before pursuing this form of trading.
There are some things to remember when trading options:
• You are not obligated to take any action with the options that you purchase. For example, if you purchase options, and choose to do nothing with them, once the expiration date passes, the option that you paid for becomes worthless. You would lose 100% of your investment in said options at that point.
• Options are basically contracts on a stock or an index, in most cases, depending on what the underlying asset of the option is. The seller of the options does not actually transfer any assets until the buyer decides to act upon the options that they have purchased.
There are two basic kinds of actions that can be taken on options.
• A "call" is when a purchaser buys the rights to an agreed upon quantity of underlying assets from the seller. It is incumbent on the purchaser to take action on these options before the option expires, if it makes financial sense to do so.
• A "put" option is the inverse of the "call" in that the "put" buyer has the right to sell an asset at a predetermined price prior to expiration of the "put" options.
Options trading can involve a great deal of risk. However, if the investor takes the precautions necessary to educate themselves on these risks, they can go a long way towards minimizing their risk. By studying up on the particular stock or stocks that you are thinking of pursuing an option on, you can also help yourself avoid losses and "worthless" options at time of expiration.
