Options Trading Basics — Introduction

Options Trading is truly the favorite financial instrument of small retail investors over the past few decades all over the world. Options Trading allows investors with very small funds to gain disproportionately big profits and to control stocks that would otherwise be too expensive to own. Indeed, there are many Options Trading gurus out there who have created million dollar accounts out of only $20,000 or $50,000. In fact, you could start options trading even if you have only $80 to spare! Options Trading also opens a whole new world of possibilities as the true power of stock options lies in its versatility. You could trade options for leverage as well as for protection and change the directional bias in your portfolio very quickly and conveniently.

Confidently, Trading Options In The US Market!

Options Trading Basics — Differences Between Stocks and Stock Options

What is the difference between stock trading and options trading? What are the benefits of buying stock options instead of buying stocks? Why have stock options created millionaires all over the world?

Options Trading Basics — What Stock Options Are

The most important thing to learn before you can even consider Options Trading is exactly what Stock Options are. In Options Trading, we are not trading the stocks itself. Instead, we are merely trading the right to own or sell those stocks and these contracts to buy or sell the underlying stocks are known as stock options. Stock Options are derivative instruments just like stock futures. Stock Options costs only very little money to buy while allowing you to control the profits on the underlying stocks as if you owned those stocks! It is very similar to the Option To Purchse you signed when you bought your house. If the price of the stock rallies strongly after you purchase its stock options, you would make those same profits without buying the stocks at all! This creates the explosive profits that you read about in Options Trading all the time.

Study the tutorial on Stock Options now.

Options Trading Basics — Long Options

Going long on options mean buying and owning an options contract. Going long on options isn’t necessarily a bullish bet like in stock trading and futures trading because you can go long on call options or put options. One is a bet to upside and the other is a bet to downside. Understanding what going long an option mean is one of the most basic options trading knowledge you need before you can even trade options.

Options Trading Basics — Call Options

Call Options are stock options that grants you the right, but not the obligation, to buy the underlying stock at a fixed price in the future. You buy Call Options when you are of the opinion that the stock is going to rise. If you buy call options with the right to buy the stock at its price right now, you could turn it around for a good profit should the stock rally because you own the right to buy it at a lower price! Call options effectively allows you to control those same profits as if you bought the stock at only a small fraction of the price.

Study the tutorial on Call Options now.

Options Trading Basics — Put Options

Put Options are stock options that grants you the right, but not the obligation, to sell the underlying stock at a fixed price in the future. You buy Put Options when you are of the opinion that the stock is going to fall. If you buy put options with the right to sell the stock at its price right now, you could turn it around for a good profit should the stock fall because you own the right to sell it at a higher price! Put options effectively allows you to control those same profits as if you have shorted the stock at only a small fraction of the price without needing any margin.

Study the tutorial on Put Options now.

Options Trading Basics — Risks Of Options Trading

Options Trading can be extremely risky in many ways and the biggest reason of all is the fact that stock options could expire worthless along with all your money put into buying them if your opinion on the stock is wrong. This is what we call expiring out of the money. This is why understanding Options Moneyness is so important to anyone who wish to start Options Trading.

Options Trading Basics — Reading Options Chains & Options Symbols

Before you can start options trading, you need to know how to read the tables in which options quotes are presented and know what the different options symbols mean. Yes, these complex array of numbers and letters could be confusing to beginners who do not understand what they mean and if you do not understand what these options symbols and options chains mean in options trading, there is no way you could trade them, right?

Options Trading Basics — Options Moneyness

Options Moneyness is the most important concept to understand in Options Trading. Options Moneyness is the value of each stock options contract in relation to the price of the underlying stock. There are 3 states; In The Money (ITM), At The Money (ATM) and Out Of The Money (OTM). Out of the money options expires worthless at expiration and the value of the stock options you bought rise in value as it gets more and more In The Money.

Options Trading Basics — Options Trading For Leverage

Perhaps the most popular use of stock options and the main reason why most people are drawn to Options Trading is for leverage. Leverage in layman terms simply means making a lot of money using only very little money. Indeed, when you buy call options, you could make 100% profit when the stock has moved only 10% due to the small upfront money you paid for the call options! Conversely, when you buy put options, you could make 100% profit when the stock has only fallen 10% again due to the small upfront money you paid for those put options. However, leverage is a double edged sword. It can produce extraordinary profits as well as very high losses, including losing all your money should your options expire worthless. Some common Options Strategy for leverage are Long Call Options and Bull Call Spreads.

Study the tutorial on Options Leverage now.

Options Trading Basics — Options Trading For Protection

Stock options are excellent hedging tools too. You could use put options to seal in the profits in your stocks without selling your stocks at all using what is known as a Protective Put. You could also control the same amount of stocks while risking very little money using what is known as a Fiduciary Call.

Options Trading Basics — Opening A Trading Account

When you have decided to take a dip into Options Trading, you would require a broker to help you do that. With today’s technology, you are able to conduct what is known as Online Trading. This means that you trade your money directly through an online portal without having to call a human broker at all! This gives you all the control you need to make precise trades. Furthermore, almost anyone from any countries can trade options in the US Market. Why should you trade options in the US Market? Simply because it has the biggest options trading market in the world and you can trade stock options of big names such as Microsoft and StarBucks.

Options Trading Basics — Types Of Options Orders

Now that you have opened an Options Trading account and ready to buy your first stock options, you need to understand what the different kinds of options orders mean. Unlike stock trading where you either buy or short a stock, there are a lot more you can do with stock options and placing trades with the wrong orders is one of the most common reason why options trading beginners lose money.

Options Trading Basics — Exercising an Option

So, now that you have taken your first toe dip into options trading by buying a few options contracts, you are now an options holder. So, what’s next? The value of your call options or put options has gone up as the underlying stock has moved in your favor, how do you take profit? As an options holder, you are entitled to the right to exercise your options in order to buy the underlying stock at the strike price of a call option or to sell the underlying stock at the strike price of a put option. This is known as to Exercise an Option. How do you actually exercise an option? Mostly importantly, is it even necessary to exercise an option in order to take profit?

Options Trading Basics — Stop Loss

Not all options trades go in the way you expect them to. Sometimes, an options trade becomes a losing trade and you run the risk of losing all your money in a single trade if you do not have a well planned and executed stop loss policy. Options are not only extremely versatile instruments on their own but the degree of customizability of their stop loss orders contribute also to their legendary versatility. So, how many ways can you stop loss in options trading?

Options Trading Basics — Liquidity

Determining the liquidity of an options contract is one of the most tricky basic issues in options trading. Many options beginners buy an option only to be able to sell that option only at a huge loss even if the underlying stock moved in its favor. In fact, some may not be able to sell their options contract at all and is forced to hold the position all the way to expiration. So, how can we tell the liquidity of an options contract?

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