Options Trading

Options Trading Made Easy

Just mentioning options starts a flurry of confusion for some people, but in the case of options, it is a case of a lot of folks making it harder than it has to be to understand.

Options trading is simply a contract that gives you the right at any time to sell or buy any particular security you choose for a specified price on or before a specified date. You are under no obligation to buy or sell on that date, you merely have the option.

When you mention a stock option, you are speaking of 100 shares, called a block. There are two terms you must learn in the realm of stock options trading. Calls which is also called a "call option", is your right to buy a block (100 shares) of stock at the specified price, also referred to as the exercise price. Meaning if you buy a call option on XYZ stock at $100 and the stock itself actually goes to $130 a share, you will realize an immediate $30 a share profit off the bat by exercising your option. The other term you need to know is a "put option". It is the opposite of a call option. It is your right to sell your shares at a specific price. As with a call option, you always have the choice not to exercise your option.

The majority of stock options are traded on the Chicago Board Options Exchange. Other exchanges where option trades are made include: The American Stock Exchange, ISE (International Securities Exchange), the Pacific Exchange, and the Philadelphia Stock Exchange. The Government agency that regulates options trading is Securities and Exchange Commission (SEC).

Options trading gives you the power to level out your investments by using the smallest amount of capital to realize the maximum return on your investments.