What is Options Trading?

The stock market may seem like a scary and intimidating world to people only taking their first steps in it, but there are actually a variety of securities investors people have at their disposal. One such security, known as an "option," opens the door to a world of opportunities for investors. An "option" is a contract that gives a buyer the right—but not the obligation—to buy or sell an underlying asset at a specific price or before a certain date. This functions as a binding contract with meticulously defined terms and characteristics.

Here’s a way to put this into context: Say you’re interested in purchasing a piece of art that catches your eye. The seller wants $10,000, but you’re not sure you’re ready to make that big of an investment. Luckily, the seller lets you make an option of $500 until the date of April 3rd. You find out on March 30th that the painting in question is actually an authentic Jackson Pollack, worth upwards of $50,000. Because of that option, you are guaranteed the piece of art AT the price of $10,000—allowing you to make a potential profit of $40,000. Conversely, you get the painting appraised and—guess what, April fools—you find out on April 1st that it is only worth $2,000. That option does not mean you are stuck plopping down $10,000 for the faux art—but you will still lose the $2,000 used for the option.

Make sense? As previously stated, an option is a right, but not an obligation. Of course, if you let the expiration date of the option pass by, the option will become worthless—and you will thus lose 100% of your investment. Keep in mind, too, that an option is merely a contract that deals with an underlying asset. In our imaginary scenario, the piece of art was the underlying asset. An option is also called a "derivative," because it derives its value from something else (i.e. the piece of art). Underlying assets are most commonly stocks or indexes.

There are quite a number of terms and lingo that is important to familiarize yourself with when speaking about options. First off, there are two type of options: calls and puts. A "call" gives the holder the right to buy an asset at a certain price within a specific timeframe. Ideally, the stock will increase significantly before the option expires, ensuring a sound and profitable investment. Another type of option is a put. A "put" gives the holder the right to sell an asset at a certain price within a specific timeframe. In this situation, a buyer hopes that the price of the stock will fall before the option expires. Buyers of options are called "holders," while sellers are referred to as "writers." The "strike price" is the price at which an underlying stock can be purchased or sold—but the total cost of an option is the "premium," which is determined by factors like the stock price, strike price and time remaining until the option expires.

This is just a rudimentary understanding of the basics of what options are and do. The world of buying and selling calls and puts is extremely tricky and difficult to navigate. That’s where the Options Oracle comes in. Let Brad Lee be your guide through the rocky terrain of options trading by handing out helpful trading tips and trade secrets. The Options Oracle exists to show investors how to maintain a steady income by purchasing the list of stocks that he uses to select options contracts he believe will return the highest profits. Think you’re ready to start buying and selling options? Look no further for than the Options Oracle for all your stock market basics and needs!

The Options Oracle is a reliable, trusted and profitable options trading website that offers options trading guidance and displays a proven, profitable track record of success. Go to http://theoptionsoracle.com/ to get started today.

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