Options: Trading Community Website

Options trading is the best thing to do in the stock market right now. Options is a contract that derives its value from the underlying asset like stocks, commodities, currencies, ETFs, bonds and even futures. An options contract gives you the right to buy or sell the underlying asset at a certain price known as the strike price before a certain date known as the exercise date by paying a small price known as premium.

Options are basically of two types: 1) Calls and 2) Puts. Calls give you the right but again note not the obligation to buy the asset at a small premium. You may exercise the right or let the call expire keeping in view the market conditions. So, if you think that Stock ABC priced at $50 right now will shoot up to $70 in the next three months, you can buy a three months call on stock ABC with a strike price of $50. You pay a small premium of let’s say $5. Now, if you have bought 1000 shares of stock ABC, it would have cost you $50,000. Options contracts are written on 1000 shares of a stock. So, by buying a call, you get the right to buy it $50 within the next three months by paying just $5,000. Just compare this amount with direct investment of $50,000 in stock ABC. You saved $45,000. You can invest this amount in buying more options. Suppose, the price does rise to $60 but not $70 as you had expected. Now, you can exercise the call and buy 1000 shares of stock ABC at $50 and sell them at $60 in the market. How much you made? $10,000. Not bad, huh! Suppose, the price did not rise but went down to $40. In this case, you don’t exercise your right and let the call expire losing $5,000 that you had invested in the call. If you had invested directly into 1000 shares of stock ABC, you would have lost $10,000 instead of $5,000. Puts work just like calls but give you the right to sell the asset. You can now see how options are used to hedge your risk and increase the return on investment.

The time period for an options contract can be from a month to as long as three years. Long term options contracts are also known as LEAPS (Long Term Anticipation Securities) and can have a time period of as long as three years. LEAPs are just like other options contracts with the only difference of having a long expiry period. Options in the hands of savvy traders can be powerful speculative instruments that provide unlimited profit potential with a limited downside risk. Trading options can be highly profitable but if you are not experienced you may lose your investment. Most inexperienced traders don’t understand the inherent volatility in these contracts. Options have both price volatility as well as time volatility. Before, investing in options, you should get a good education on how to trade them. Without training, don’t try to invest in them!

You can even trade Index Options that are written on Stock Indexes like Dow Jones, S&P 500, NASDAQ, FTSE, DAX and others. In the same manner, you can invest in ETF Options that give you an opportunity to bet on an entire industry or sector instead of betting on a single security. Options on futures provide ultra aggressive investors with a high flying speculative instrument with high return potential. Before investing in options, you need to understand this fact that options can be risky as they have a time window before they expire. So suppose, you think that Google Stocks GOOG are going to rise in the next three months. You buy call options on GOOG. Now, if GOOG does not cooperate and does not rise as you had wanted it to, your options contracts will go worthless! So you always need to be cognizant of the time volatility of options contracts.

What you need is a good course on how to trade options. Chris Rowe is considered to be a master options trader who astonished the trading community in 2005 by not losing even a single options trade in the whole year. You need to learn from him and take a look at his Options GPS Course!