In these tough economic times, people are less sure what they should do with their money. Should they be investing in the stock market? Should they be putting money into the bank? Should they be buying real estate? It is hard to know, but one thing is for sure, you are required to think hard about the types of risks, and returns, you’re willing to make. You do not want to risk your, or your family ‘s, financial future on a bad investment, but you still wish to add value to your bank account.
The practice of trading options is a major way to invest their money and make a good return on it, for some people. Because of the way trading options occurs, it’s possible to minimize your risk of losing money. It is likewise possible, as many people will tell you, to make a great deal of money through trading options. But to do it well, you need to get a good sense of what you’re doing. Don’t make the error of going into trading options blindly.
Trading options is a term used to refer to a kind of agreement in which two parties agree to purchase and sell a commodity at some future date at some price. For example, perhaps party A agrees to buy 10 shares of a stock from party B on June 1 at the price of 10.00 A stock. However, because party A is trading options, he doesn’t have to purchase the stock if he decides against it. He can opt out of making the buy. The terms can be established between the two parties as to how long party A has to either opt in or opt out of making the buy. This is the due date, or expiry, in trading options.
What this option does for party A is to minimize his risk—if the chances aren’t good that he’ll profit from buying the asset, or if the price is greater than the return he can get on it, he doesn’t have to purchase anything. All that he loses by letting the trading option expire is the fee he paid party B, usually a factor, to reserve his option. This trading fee is how party B makes some of her money.
Above, we spoke about the basic form that trading options takes. But the example given is just one of two different ways trading options can take place. The above scenario is an example of a Call option, the option to buy. There are also what are known as Put options. These in trading options means the option to sell.
Call options are ways of buying commodities that depend on buying that commodity at a price lower than its market value. Party A buys the 10 stocks, for example, at 100.00 When on the open market they’re worth 200.00. Party A can thus double his investment. Put trading options, on the other side, allow you to sell a commodity for longer than it is worth on the open market. In this scenario, party A exercises his right to sell his 10 stocks to party B at 100.00 Even though they’re only worth 75.00. He has thus made 25.00 Against the open market.
Sell the call option on a up day. An up day is defined as when the Dow and the NASDAQ are in the green (even if it’s only a small amount). The reason for here is the option premiums received will be more than on a down day.
Many people have made good incomes trading options. Some people have even gotten rich from the practice, making millions of united states dollars in this way. Unfortunately, some people have also lost a whole bunch of money while trading options. This might have been because the market went against these traders, or it might have been that they made unwise decisions to opt on their capacity to make Put or Call trades.
The truth is, there are long shot trades and there’s the much more sure trades. Sure trades generally make less short term profits but they’re less risky to engage in. For many people, making sure trades results in good profits over the long term. Other people, however, prefer to take greater risks with their trading options in the expectation that the returns, often short term returns, will be bigger. This is evidently a risky business, although some people have made a great deal of money in this manner.
Either way, trading options is an important part of investing today. If you’re looking to invest money, surely you should consider trading options. Call your agent or financial advisor and ask about this potentially lucrative strategy.