Not everyone is familiar with options. Usually only the most complicated ibvestors know about it and trade then Investing with options is all about customization. Rewards can be high but so can the risk and your choices are plenty. But getting started isn’t easy, and there is potential for costly mistakes. Here’s a brief overview of option trading that cuts through the jargon and gets right to the core of this versatile way to invest.
Option trading is for the DIY investor.
Typically, option traders are self-directed investors, meaning they don’t work directly with a financial advisor to help manage their options trading portfolio. As a do-it-yourself (DIY) investor, you are in full control of your trading decisions and transactions. But that doesn’t mean you’re alone.
There are plenty of communities that bring traders together to discuss things like current market outlook and option trading strategies.
Most beginners start with stock options.
Options based on equities, more commonly known as “stock options,” typically are a natural lead for traders new to options. Stock options are listed on exchanges like the NYSE in the form of a quote. It is important to understand the details of a stock option quote before you make a move— like the cost and expiration date.
Once you know what each segment represents, you can understand important details of the option contract— including the type, cost, and expiration date— at a glance.
There are different types of options.
Options are contracts that give the owner the right to buy or sell an asset at a fixed price for a specific period of time. That period could be as short as a day or as long as a couple of years, depending on the type of option contract. Fortunately, there are only two types of standard option contracts: a call and a put.
A call option contract gives the owner the right to purchase 100 shares of a specified security at a specified price within a specified time frame.
A put option contract gives the owner the right to sell 100 shares of a specified security at a specified price within a specified time frame.
It’s important to note, for both types of option contracts— a call or put— the owner is not obligated to exercise his or her right to buy or sell.
Options trade on different underlying securities.
Options can be used in many ways – to speculate or to reduce risk— and trade on several different kinds of underlying securities. The most common underlying securities are equities, indexes, or ETFs (Exchange Traded Funds).
There are quite a few differences between options based on indexes versus those based on equities and ETFs. It’s important to know the differencesbefore you start trading.