Options Trading Strategies

Investing in the stock market can be a great way to save money and make money, if you know what you’re doing. If you don’t know what you’re doing, investing in the stock market can be a great way to lose money and become poor quickly. This is especially true for specific aspects of stock trading, such as options trading strategies. A good options trading education is particularly important, even if one decides that options trading strategies are too risky to be included in a portfolio.

What is options trading? Essentially, a stock option is a right to buy a stock, without actually buying it. The hope is that the stock price will rise, giving the investor the right to sell the option at a profit, or to call the option and sell the stock immediately.
For example, imagine that ABC Company’s stock shares are currently at $100 per share. If you think the stock will go up, you could buy a few shares and hold them until that happens. If you have $500, you can buy five shares, and if the stock goes to $120 per share your net profit is $100.

With option trading, you do not buy the actual stock, but only the right to buy it. If the stock is at $100, perhaps you would purchase the option for $10. At $10 per option, your $500 will get you the rights to fifty stocks, instead of only five. If the stock goes to $120 per share, you call the stock, which means you exercise your right to buy the stock at its original price of $100 per share, and then turn around and sell it for the new price of $120. This means that you’ll have the 120% worth of your fifty shares, which have gone up a collective $1000. Subtract your cost of the trading options and you’re left with a net profit of $500.

In the first case scenario, your profit is 20% of your initial investment, the same as the increase in stock price. But, in the second case, your profit is 100% of your initial investment. Options are a way to trade higher volume of stocks with less money. Of course, the higher volume you trade the more you can potentially lose, which is why option trading is more risky. Good options strategies calculate risk and trade accordingly.