What Is Options Trading?

Basically options investing consists of a buyer (taker) purchasing the right to do something from a seller (writer). The most popular forms of options trading are stock options and commodity options, but options can be used in any market with price fluctuations.

So the idea behind options are this. The writer (seller) feels the stocks he owns at $20.00 are going to stay at that price for lets say, a month. So he would write an option for those shares at say $0.20 (twenty cents). You feel this stock is going up in the next month so you buy a $2000 dollar option off this seller which means you have control of 10,000 shares (2000 divided by 0.20). If the price does go indeed go up, as you anticipated to say $23.00 you have made yourself a nice $3000 dollar profit. This is true because you now control the option to purchase the for $20,000 while they are worth $23,000.

However the downside here is if the price goes down by say 10 cents you lose your whole investment where if you would have bought 100 shares of this stock with your $2000 your loss would have only been $10. So obviously you need to know what you are doing.

There are lots of good books available to help you to learn about options, futures, and investing in general. I suggest you do some reading before you decide to jump into options investing.

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