What Is Options Trading?

Options trading was born in 1973. That’s when the options market became an active market place. It has since evolved into a sophisticated trading vehicle. As you might guess, numerous market advisors and investors have created what are called options trading strategies.

You obviously can’t have strategies without the trading. They are hand in glove. But the question still remains, what is options trading?

In its most basic form, options trading is paying for the right to buy or sell stocks or futures at a particular price over a given time, or selling the right to someone else to buy or sell stocks or futures for a particular price over a given time.

Notice the word “right” in the above paragraph. Options grant rights not obligations. In other words you have the right to buy the stock, let’s say, should you buy a call and the stock price moves in your favor. Or, if you buy a put, you can sell the stock if it too moves in your favor.

You are under NO obligation to act. You can let the call or put just mentioned expire should you so elect. This is different than buying the underlying stock outright. Once you buy it, you own it. It sounds funny to say you are obligated to own it once you buy it. But that is exactly the state you are in.

By inference then, option trading offers the trader advantages. This article won’t discuss the tax advantages or other implications as they are beyond its scope.

However, the actual trading is not beyond its scope. Hopefully before anyone enters into the options realm they are equipped with basic, at minimum, knowledge of this critter called options. The investor must know the difference between a call and a put and a buyer and seller.

If this sounds like a foreign tongue speaking, please do your homework first and trade later. You will save yourself a small fortune. You don’t want to pay for knowledge you can get for free.

Options trading is like stock trading. You can buy or you can sell. Calls were created for the person who wants to buy a stock. Puts were created for the person who wants to sell a stock. Mind you, stocks are not the only securities which offer options.

The others are also beyond the scope of this article. Do a little research in your favorite search engine and you will find all the securities that are optionable.

Thanks to the Internet, online options trading is now a reality. All a person needs is a computer, be an approved option trader through his broker and he can trade options via his broker’s website. Life as options trader couldn’t be easier.

So what is trading options? It is trading an investment vehicle that offers the potential to make money, hedge a portfolio and, in general, provide insurance the stocks or bonds in someone’s account. Therefore, it becomes another way to play the market.

Leave a Reply

Your email address will not be published.