Options Trading

Written by Michael Federico
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Many people are under the impression that options trading is essentially the same thing as trading stocks. Stocks are often involved in options trading, but the two practices function on different principles. When a person buys a share of stock, he is usually under the impression that the price of the stock will rise and some time in the future he will sell it, making a profit in the process. The value of the share comes from the share itself.

Options are in a class of securities called derivatives, because their value is derived from another asset's value. For example, a stock option's value comes from the underlying stock. A foreign currency option's value rests on the price of the underlying currency.

When a person buys a stock option, he is not actually buying stock. He is buying the right to buy (call option) or sell (put option) 100 shares of a stock at a certain price (strike price) for a certain amount of time (date of purchase to expiration date). He is not obligated to purchase or sell the shares.

What Does Options Trading Offer?

When buying options a person is banking on the fact that the price of a stock is going to increase or decrease significantly in a relatively short period of time. A lot of money can be made in options trading. However, there are different regulations than those regarding stock trading. Jumping into the options market can be seemingly complex, so whether a person works with a broker or trades on the Internet, he should talk to people who have been involved with options and have been successful in their pursuits.


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