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The following article was published in our article directory on November 11, 2009.
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Stock Options Trading – Learning the Basics

Article Category: Business

If you've been trading for a long time, you may already have quite a portfolio of stocks, bonds and other financial instruments. But you may be looking to expand your portfolio some more. If you're willing to take the time to learn, then why not try to get into stock options? Stock options trading is a challenging but ultimately worthwhile investment activity that could open for you a new world of profit opportunities.

First of all, what is a stock option? A stock option is basically a contract that gives its holder the right but not the obligation to trade a certain underlying asset, in this case shares of stocks, at a particular price and at a certain time. They are also known as derivatives, since they are derived from stocks. There are two types of stock options: put and call. The put option gives the holder the right to sell the stock while the call option gives the holder the right to sell it. In order to secure the option you pay the seller an ask price or a premium, which is determined by the present market price of the stock. This premium is not fixed and can increase or decrease depending on the movement of the stock price.

A couple of particular things to remember: in options contracts, stocks are always sold in lots of 100 and the expiration date is always the 3rd Friday of the month decided as the expiration of the contract.

How can you make money with a stock option? Let's say you believe that the stock of JHG Research will go up in the future from its present market price of $43. You then secure a put option to buy shares of JHG at a price of $45 per share. If JHG shares go up to $47, then you're in luck. You buy your shares for $45 and sell them at $47 for a profit of $2. But if not, well the good thing is you don't have to buy the shares. You can simply allow the contract to expire and lose only whatever premium you paid to secure the option. Or you can sell the contract to someone else, for $46 for instance, and make a profit of $1.

But you can also make money if the stock price decreases. In this case you take out a call option on JHG, also for $45. If its share price then goes down to $41 then you buy shares of JHG and exercise your call option for a profit of $4.
The above examples show options used for speculation. But investors can also use options to hedge against future risks. For example, if you're investing in highly volatile stocks like technology stocks then you can use options to hedge you against losses, while maximizing your profit potential.

Now that you have an some knowledge of the basics of stock option trading, you may decide to plunge in. Don't; remember that as with any investment activity, there are risks involved and options trading is more complicated than it sounds at first. Take the time to study options carefully and eventually they'll become a potent investment tool for you.

Keywords: option picks, options trading course, stock options trading, option trading online, options traders, online options trading

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