There are a lot of people who would like to speculate in the market but are unsure of the best way.
Perhaps these people think that they do not have enough money.
For many individuals the best approach is to look into stock options trading.
Because options represent a security but are not actual ownership, there is a great deal more risk when dealing with them.
However, for this same very reason, there can be a great deal more profit.
A small initial investment can yield a substantially greater profit.
What you need to understand is that time is extremely important.
What these instruments do is give the person who is holding them an option to either buy a companies issue at a set price or sell it at a set price.
You need to know the basics before you can learn advanced option trading strategies.
The first type, a call, allows you to buy a particular stock at a predetermined price during a certain time period.
The cost for buying an option is known as the premium.
The call is the type of option that allows you to call away a stock.
This means that you have the right to buy the issue at whatever the predetermined price was.
Take the following example.
You purchase a call for five dollars that allows you to buy shares of Z for one hundred dollars.
If the companies share is currently trading for ninety it might cost ten dollars.
If the companies price rises above one hundred dollars the premium of the option will increase.
At this point you may choose to sell the call on the open market.
This makes you a guaranteed profit.
Remember, that options are decaying assets and decrease in value the closer to expiration.
So if the stock begins to lose value the call will also.
This is the reason most professional options traders never wait until expiration.
The money is made selling the call for more than you brought it for.
It is something very interesting to note that most all calls never are exercised.
The way to make money trading options is to buy and sell them, and not try and get the profit buy ending up owning the stock.
If you think a company is going to increase in value you would be advised to buy a call.
However, if you think that the company is going to lose value than what you would do is initiate a put contract.
A put is the ability to sell a stock at a predetermined price.
Consider the following.
You think that company Z is going to lose value.
Its share is currently being sold for fifty dollars.
So you buy a put that allows you to sell it for fifty.
If that companies issue drops to forty dollars you will have made ten dollars minus the cost of the option.
The majority of traders and economists are all of the same opinion that options are expiring objects.
Because of this almost all persons involved in their trading buy and sell without ever getting to expiration.
The profit is made by selling an option to buy an underlying stock not actually looking to get a company cheaper than it is currently.
Ideally, you will never get close to expiration.
Over 90% of options contracts expire worthless!