Options trading is mysterious and exciting to some people and off-putting to others. The reality is that it’s completely different from anything that you’ve read in the press before.
It’s best to try to come to it fresh with an open mind, learn what it’s all about, and whether it sounds like something you’d like to try. This way, you’ll draw an appropriate conclusion for you and not accept standard dogma.
Let’s dive into options trading from the basics up to give you a primer on what you need to know. The rest is learned by advanced study and practice trades to get accustomed to it.
What is Investing?
Let’s start with the absolute basics.
Investing isn’t one thing alone. It’s many different things.
For instance, people can purchase shares of a company to invest in it. They could also purchase a bond, which is a fixed-income security that pays a coupon (interest payment) until the bond matures on a fixed date.
It’s also possible to use pairs currency trading between two currencies betting on the direction that currencies will move against one another.
There’s day trading, which is super intensive, takes over your life, and involves buying and selling shares of companies (and other things) very quickly by taking advantage of short-term market movements.
And that’s just the tip of the iceberg when you are investing in many things. Options trading, which we cover below, is just one of those investment strategies and it differs from all the others.
What Is an Option?
An option is acquiring the right to purchase (or sell) a position at a predetermined date. Often, the date might be several months or longer into the future, rather than tomorrow or the next day.
There is no requirement to purchase the underlying stock of the company on that date.
An investor can acquire a Call option, which is an agreement to buy an asset (like shares in a company) at a certain price on an agreed date.
Also, the investor can acquire a Put option, an agreement to have the right to sell an asset at an agreed price on a certain date.
How is Money Made?
Investors can make money with options trading by learning about companies and industries to appreciate how they’re performing. Doing so will provide a better understanding of the businesses and how this relates to their stock market performance.
By understanding whether their stock has been on the downswing but is due to rise back up, it’s possible to acquire an options derivative that can profit from the predicted movement.
Is It Time-Intensive?
For anyone interested in earning a living outside the office, the good news is that options trading is nothing like day trading or other more active investment strategies.
Here, you’re not dealing with the very short-term price movements that are difficult to predict and often seem to move randomly on any given day. Instead, you’re looking at companies where their stock price has either moved up (or down) significantly quite recently and is likely to correct in the opposite direction within the next few weeks or months.
Therefore, companies and their market movements can be studied at your leisure and trading decisions made when you’re ready. Then the trades can be executed in seconds.
Is It Capital Intensive?
Options are usually priced at a steep discount to the underlying stock price.
For instance, while a stock might be priced at $150 per share, a stock option to buy it at a future time might cost only $4-5 per share. Therefore, it’s possible to see the value of the options change without needing to purchase the stock. It also doesn’t require anywhere near as much capital either.
We hope this gives you a good idea about options trading. It’s not too complicated, and you get better with practice too. It’s also not time-consuming like day trading either.