Options Basics Tutorial.
Nowadays, many investors' portfolios include investments such as mutual funds, stocks and bonds. But the variety of securities you have at your disposal does not end there. Another type of security, known as options, presents a world of opportunity to sophisticated investors who understand both the practical uses and inherent risks associated with this asset class.
The power of options lies in their versatility, and their ability to interact with traditional assets such as individual stocks. They enable you to adapt or adjust your position according to many market situations that may arise. For example, options can be used as an effective hedge against a declining stock market to limit downside losses. Options can be put to use for speculative purposes or to be exceedingly conservative, as you want. Using options is therefore best described as part of a larger strategy of investing.
This functional versatility, however, does not come without its costs. Options are complex securities and can be extremely risky if used improperly. This is why, when trading options with a broker, you'll often come across a disclaimer like the following:
Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital.
Options belong to the larger group of securities known as derivatives. This word has come to be associated with excessive risk taking and having the ability crash economies. That perception, however, is broadly overblown. All “derivative” means is that its price is dependent on, or derived from the price of something else. Put this way, wine is a derivative of grapes; ketchup is a derivative of tomatoes. Options are derivatives of financial securities – their value depends on the price of some other asset. That is all derivative means, and there are many different types of securities that fall under the name derivatives, including futures, forwards, swaps (of which there are many types), and mortgage backed securities. In the 2008 crisis, it was mortgage backed securities and a particular type of swap that caused trouble. Options were largely blameless. (See also: 10 Options Strategies To Know .)
Properly knowing how options work, and how to use them appropriately can give you a real advantage in the market. If the speculative nature of options doesn't fit your style, no problem – you can use options without speculating. Even if you decide never to use options, however, it is important to understand how companies that you are investing in use them. Whether it is to hedge the risk of foreign-exchange transactions or to give employees ownership in the form of stock options, most multi-nationals today use options in some form or another.
This tutorial will introduce you to the fundamentals of options. Keep in mind that most options traders have many years of experience, so don't expect to be an expert immediately after reading this tutorial. If you aren't familiar with how the stock market works, you might want to check out the Stock Basics tutorial first.
The NASDAQ Options Trading Guide.
Equity options today are hailed as one of the most successful financial products to be introduced in modern times. Options have proven to be superior and prudent investment tools offering you, the investor, flexibility, diversification and control in protecting your portfolio or in generating additional investment income. We hope you'll find this to be a helpful guide for learning how to trade options.
Understanding Options.
Options are financial instruments that can be used effectively under almost every market condition and for almost every investment goal. Among a few of the many ways, options can help you:
Protect your investments against a decline in market prices Increase your income on current or new investments Buy an equity at a lower price Benefit from an equity price’s rise or fall without owning the equity or selling it outright.
Benefits of Trading Options:
Orderly, Efficient and Liquid Markets.
Standardized option contracts allow for orderly, efficient and liquid option markets.
Flexibility.
Options are an extremely versatile investment tool. Because of their unique risk/reward structure, options can be used in many combinations with other option contracts and/or other financial instruments to seek profits or protection.
An equity option allows investors to fix the price for a specific period of time at which an investor can purchase or sell 100 shares of an equity for a premium (price), which is only a percentage of what one would pay to own the equity outright. This allows option investors to leverage their investment power while increasing their potential reward from an equity’s price movements.
Limited Risk for Buyer.
Unlike other investments where the risks may have no boundaries, options trading offers a defined risk to buyers. An option buyer absolutely cannot lose more than the price of the option, the premium. Because the right to buy or sell the underlying security at a specific price expires on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the option contract are not met by the expiration date. An uncovered option seller (sometimes referred to as the uncovered writer of an option), on the other hand, may face unlimited risk.
This options trading guide provides an overview of characteristics of equity options and how these investments work in the following segments:
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The "Experts" Claim That Options Trading is Risky Yet Options, When Used Correctly , Can Reduce Overall Investment Risk and Even Provide a Steady Stream of Retirement Income.
When I first learned about options trading I was completely skeptical!
The above headline sounds "too good to be true" . Which is precisely why I created a FREE $3,000 web based options trading course to prove that it is true.
The course will teach you how to make money regardless of the direction of the stock market (up, down, or sideways).
And I FULLY expect you to verify each and every claim in this options course. It's what any prudent investor would do.
So hold your judgement until you verify everything I am saying.
To make things easy for you I made this home page the starting point of the web based options course . To get started, just fill out the form below.
Step 1: Enter your below. The Transparent Trading Newsletter will give you full access to the course as well as the bonuses. I'll send you daily s to guide you through the course and from time to time I'll send trade alerts so you can see what I trade in real time.
Discover five ways to achieve financial freedom in five years or less. Just enter your to the right (unsubscribe at anytime).
If you prefer to learn on your own, just read the overview below which will give you a big picture overview of the course.
If you properly learn the option trading strategies taught in the course you'll be able to make money regardless of the direction of the stock market (up, down, or sideways).
Trading stock options can be fun and it can also be risky. If you trade the right way the rewards are great, but if you don't you'll lose money (trust me, I know from experience).
However, once you learn the power of put and call options, investing will never be the same again. The versatility and profit potential of options trading is nearly unmatched in the stock market arena.
I even heard Warren Buffet (the world's richest investor) uses stock options.
However, due to the leveraged profit potential, many people are attracted to options trading for the wrong reason.
So if you are one of the many who are looking for "get rich quick" with no work on your part please look elsewhere.
I don't want to teach you until you are clean and off that drug.
I mainly cater to people who are looking to create an additional stream of income so they can spend more time with their family.
Thus, I teach a sensible, low risk, approach to investing. But like anything worthwhile, it's going to take a lot of hard work before you succeed!
The Learning Modules of the FREE Web Based Options Course.
The web based options course will teach you the simple 7 step process I use to trade stock options. For the most effective learning experience, read through each lesson in the exact order as they are listed.
Module 1: Option Basics.
This section goes over the basics of stock options trading. You'll learn what stock options are, and will be taught the concept of how trading stock options can be profitable.
Module 2: Option Value.
Stock options are so unique and understanding how options are valued can be confusing. This learning module teaches you the basic components that give stock options their value.
Module 3: Basic Strategies.
I feel there is no use learning advanced option strategies unless you can make money with the basics, so here I outlined five basic option trading strategies.
Module 4: Stock Charts.
Stock options are derived from stocks so you need at least a basic understanding of how to read stock charts. This section outlines the basic principles of stock chart reading.
Module 5: Technical Indicators.
This is a follow up to the stock chart lesson. It goes over a few basic tools used by traders to help them interpret stock price movement.
Module 6: The 7-step process I use to trade stock options.
This is where all the lessons will be tied together. You'll be walked through the 3-step process of trading (when to enter, when to exit, and how to manage risk and profits).
To get started click on this link and you'll be taken to the first lesson of the course.
Message from Trader Travis: I don't know what has brought you to my page. Maybe you are interested in options to help you reduce the risk of your other stock market holdings.
Maybe you are looking for a way to generate a little additional income for retirement. Or maybe you've just heard about options, you're not sure what they are, and you want a simple step-by-step guide to understanding them and getting started with them.
I have no idea if options are even right for you, but I do promise to show you what has worked for me and the exact steps I've taken to use them to earn additional income, protect my investments, and to experience freedom in my life.
Just enter your best below to claim my FREE report: Five Option Trading Strategies I've Used to Profit In Up, Down, and Sideways Markets.
Along with your FREE report, you'll also get my daily s where I share my favorite option trading strategies, examples of the trades I'm currently in, and ways to protect your investments in any market .
Products Created by Trader Travis.
Free Options Course Learning Modules.
Module 1: Option Basics.
Module 3: Basic Strategies.
Module 6: The 7-step process I use to trade stock options.
Copyright В© 2009 - Present. The Options Trading Group, Inc. All rights reserved.
DISCLAIMER: All stock options trading and technical analysis information on this website is for educational purposes only. While it is believed to be accurate, it should not be considered solely reliable for use in making actual investment decisions. This is neither a solicitation nor an offer to Buy/Sell futures or options. Futures and options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this video or on this website. Please read "Characteristics and Risks of Standardized Options" before investing in options. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
Getting Acquainted With Options Trading.
Many traders think of a position in stock options as a stock substitute that has a higher leverage and less required capital. After all, options can be used to bet on the direction of a stock's price, just like the stock itself. However, options have different characteristics than stocks, and there is a lot of terminology beginning option traders must learn.
[There's a common misconception that options are confusing and overly complex, but that simply isn't the case. Build on what you learn from this article and see how you can leverage options to build a more robust through taking Investopedia Academy's Options for Beginners course. ]
Two types of options are calls and puts. When you buy a call option, you have the right but not the obligation to purchase a stock at the strike price any time before the option expires. When you buy a put option, you have the right but not the obligation to sell a stock at the strike price any time before the expiration date.
One important difference between stocks and options is that stocks give you a small piece of ownership in the company, while options are just contracts that give you the right to buy or sell the stock at a specific price by a specific date. It is important to remember that there are always two sides for every option transaction: a buyer and a seller. So, for every call or put option purchased, there is always someone else selling it.
When individuals sell options, they effectively create a security that didn't exist before. This is known as writing an option and explains one of the main sources of options, since neither the associated company nor the options exchange issues options. When you write a call, you may be obligated to sell shares at the strike price any time before the expiration date. When you write a put, you may be obligated to buy shares at the strike price any time before expiration.
Trading stocks can be compared to gambling in a casino, where you are betting against the house, so if all the customers have an incredible string of luck, they could all win.
Trading options is more like betting on horses at the racetrack. There they use parimutuel betting, whereby each person bets against all the other people there. The track simply takes a small cut for providing the facilities. So, trading options, like the horse track, is a zero-sum game. The option buyer's gain is the option seller's loss and vice versa: any payoff diagram for an option purchase must be the mirror image of the seller's payoff diagram.
The price of an option is called its premium. The buyer of an option cannot lose more than the initial premium paid for the contract, no matter what happens to the underlying security. So, the risk to the buyer is never more than the amount paid for the option. The profit potential, on the other hand, is theoretically unlimited.
In return for the premium received from the buyer, the seller of an option assumes the risk of having to deliver (if a call option) or taking delivery (if a put option) of the shares of the stock. Unless that option is covered by another option or a position in the underlying stock, the seller's loss can be open-ended, meaning the seller can lose much more than the original premium received.
You should be aware that there are two basic styles of options: American and European. An American, or American-style, option can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style and all stock options are American style. A European, or European-style, option can only be exercised on the expiration date. Many index options are European style.
When the strike price of a call option is above the current price of the stock, the call is out of the money; when the strike price is below the stock's price it is in the money. Put options are the exact opposite, being out of the money when the strike price is below the stock price and in the money when the strike price is above the stock price.
Note that options are not available at just any price. Stock options are generally traded with strike prices in intervals of $2.50 up to $30 and in intervals of $5 above that. Also, only strike prices within a reasonable range around the current stock price are generally traded. Far in - or out-of-the-money options might not be available.
All stock options expire on a certain date, called the expiration date. For normal listed options, this can be up to nine months from the date the options are first listed for trading. Longer-term option contracts, called LEAPS, are also available on many stocks, and these can have expiration dates up to three years from the listing date.
Options officially expire on the Saturday following the third Friday of the expiration month. But, in practice, that means the option expires on the third Friday, since your broker is unlikely to be available on Saturday and all the exchanges are closed. The broker-to-broker settlements are actually done on Saturday.
Unlike shares of stock, which have a three-day settlement period, options settle the next day. In order to settle on the expiration date (Saturday), you have to exercise or trade the option by the end of the day on Friday.
Most option traders use options as part of a larger strategy based on a selection of stocks, but because trading options is very different from trading stocks, stock traders should take the time to understand the terminology and concepts of options before trading them.
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