What is options trading? Well quite simply, with options trading, the taker (or purchaser) is buying a right to do anything from the writer (or vendor). There are various types of options trading, with stock options and commodity options being the most usually used. Options trading can be employed in any market where the prices of items fluctuate; this will in reality include all markets.
We see no need to buy options after trading options for a number of years with so much success. We have discovered, when options are sold correctly and carefully, they can generate a higher percentage return than any other option or stock trading strategy.
So how exactly does an option work? Well suppose the price of a share is $10 today. You think the price of the share is going to rise to $12 over the coming month. A great idea in this case would be to buy tons of the shares. However, you’re not always able to buy such shares, and often you’ll not have sufficient money to buy too many of them. In this example, if you had $1000 you could only buy 100 shares. This means you would gain $200 if the price went up as you’re hoping. This isn’t a bad return but you may be wishing to make a little more than $200 on the information you have.
You can pay a premium to a writer for an option with options trading. Supposing the writer believes the price of the share is going to suspend the same during the next month, that is stay at $10. Then if you offer him 10 cents a share, for an option to purchase the shares at $10 in a month %u2019s time, he should be willing. After all, he thinks they %u2019ll still be worth $10 so he %u2019ll be making 10 cents a share on shares he does n %u2019t even own, and all he has something to do is sell them to you at their current price in a month %u2019s time, if you want them.
At ten cents a share, your $1000 could buy you an option to buy 10, 000 shares. Now if the price goes up to $12, you’ll immediately have a $2000 gain. This is since you have an option to buy them for $10, 000 and can immediately sell them for $12, 000. You %u2019ve made a 100% gain rather than a 20% gain. This is how options trading can work to your advantage. However, you can lose big with options trading. Suppose the shares dropped to $9.90. This is a small drop but instead of losing $10, if you had bought the shares, you’ll have lost your entire bet.