Stock Option Trading 

Trading Stock Options

It's said stock options are not for beginners but I wouldn't agree. It's certainly true that it's easier to trade stocks than options but not necessarily because stocks are less risky. There are many stocks which are more risky to trade than some options and with today's direct access to stock option trading information, everbody has a chance.

If you have a basic understanding what options are and how they work there is no reason why you shouldn't try options. In theory options sound very complicated but they are actually very simple. There are just a few rules to remember. Many online stock trading brokers are also offer trading stock options, but not all.

When you buy a stock option then it's almost the same as buying the stock, just that you need less money for it. So if you buy an IBM option contract then it's the same as you would buy 100 shares IBM. If you sell the IBM option it's the same like selling 100 shares of IBM. It's that simple but here are the details.

Options trade in contracts and not in shares. One contract equals 100 shares. Options expire, stocks don't. Options have a different price than the stock. Options have another price, the strike price. Understanding the stock market means also to understand stock options.

So what is it all about and why should someone trade options? Stock options have advantages and disadvantages. The biggest advantage is that you need much less money to buy the same amount of shares. To buy 1000 shares of IBM you would need $80,000.- if the current stock quote is $80. To buy 1000 shares of IBM through options you would probably only need 10% of it, about $8,000.-

The big advantage of options is at the same time it's biggest risk. It's the leverage involved. With just $8,000.- you control shares worth $80,000.- but like with shares you can never loose more than your initial investment.

Options are not only used for speculation but also for reducing risk and protecting stock positions. That's the main purpose of stock options.

There are so called “call options” and “put options” and endless combinations of them which are really for experienced traders. The call option does what I described before. You buy a call option to buy a stock. When the stock goes up then your option does too and you make the same profit as you would with owning the shares.

If you buy the put option then you do it because you believe the stock price will go down. If it does then you make a profit with your put option. If the stock price goes up then you make a loss. It's the same as a short sale in stocks.

Options are that simple. Just a last thing to consider is that options have a strike price and expiration date. It means that your option expires one day and until then the option is loosing some value, little by little every day. This is a disadvantage of option trading but you have the higher leverage for compensation.

Another confusing part of options can be the different strike prices but it's not a science as well. Options give you the right to buy or sell a stock at the fixed strike price. That's why there are so many options for just one stock. These are just all variations of strike prices and expiration dates.

There is a lot of stock option trading information out there and it is free. Armed with that knowledge you can start to gain some experience by just buying and selling 1 single contract.