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  • Options Trading - Basics

    Options Trading - A Simple Explanation
    money and coins

    Hey Guys,

    Lets understand the basics of Options Trading

    Lets learn some basics about Options Trading. Options trading is really like the next step in stock market. everybody first learns stock trading and then gets interested in options. Overall Options are highly risky but heavily rewarding if done right. let me be clear, if you want to do options trading, you must have margin trading account.

    But what are options.I will try to explain this by giving an example. Say that I want to buy a house and you want to sell your house. You're asking $100 K for your house. I (the buyer) really like the deal, but need to check elsewhere before I commit to buying your home for $100K. So let’s say that you decide to sell me an option that gives me the 'right' to purchase your home at a stated price of 100K. And for selling me that 'right', I will pay you $1,000. Also in this contract, you state that this option will only be good for 6 months.

    If during the 6 month period, I (the buyer) do not notify you that I intend to exercise or use my option to buy your house at the stated price of $100K (Basically just 9k as you already paid 1k for the option), the option expires worthless and ceases to exist. In this case, I would have forfeited the $1,000 that I paid to you for the option. Meanwhile, you, the option seller, gets to keep the $1,000. For example, if I found out during a tour of the house that their are lots of cracks in the wall and there is ghost of an old man in the bedroom and an army of rats in the basement, I can just decide not to buy the home and My only loss will be $1000 that I paid to you to buy the option.

    Now let’s say that two months later, home prices in your neighborhood suddenly rose in anticipation of the building of a mega-shopping mall. In this case, your house is now worth $120K. Remember that I still have the right to buy your house at $100K. I can now either exercise my option or I can just sell it. I could exercise my option and purchase your house at the stated price of $100K and immediately sell it for $120K, thus netting a $20,000 profit ($120 - $99K - $1K). Or I can sell my option to someone else for at least $21K.

    So I earned 20000 profit by investing just 1000. That's 20 times the money. This is just an example

    God Bless,
    Be Rich. 

    Tags : stock options trading, stock options, trading options tutorial, options trading strategies, futures trading, online options trading


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