Simple explanation of options trading
There is certainly a lot you should learn before you actually get started and invest your money. With that being said, however, most of the fundamentals aren't actually that difficult to comprehend. Once you have grasped the basics, it becomes much easier to understand exactly what options trading is all about. Buying an options contract is in practice no different to buying stock. You are basically taking a long position on that option, expecting it to go up in value.
You can buy options contracts by simply choosing exactly what you wish to buy and how many, and then placing a buy to open order with a broker. This order was named as such because you are opening a position through buying options. If your options do go up in value, then you can either sell them or exercise your option depending on what suits you best. We provide more information on selling and exercising options later.
One of the big advantages of options contracts is that you can buy them in situations when you expect the underlying asset to go up in value and also in situations when you expect the underlying asset to go down.
If you were expecting an underlying asset to go up in value, then you would buy call options, which gives you the right to buy the underlying asset at a fixed price. If you were expecting an underlying asset to go down in value, then you would buy put options, which gives you the right to sell the underlying asset at a fixed price. This is just one example of the flexibility on these contracts; there are several more.
If you have previously opened a short position on options contracts by writing them, then you can also buy those contracts back to close that position. To close a position by buying contracts you would place a buy to close order with your broker. There are basically two ways in which you can sell options contracts. First, if you have previously bought contracts and wish to realize your profits, or cut your losses, then you would sell them by placing a sell to close order.
The order is named as such because you are closing your position by selling options contracts. You would usually use that order if the options you owned had gone up in value and you wanted to take your profits at that point, or if the options you owned had fallen in value and you wanted to exit your position before incurring any other losses.
The other way you can sell options is by opening a short position and short selling them. This is also known as writing options, because the process actually involves you writing new contracts to be sold in the market. When you do this you are taking on the obligation in the contract i. Writing options is done by using the sell to open order, and you would receive a payment at the time of placing such an order. Besides the options listed above that expire in December, there are other expiration dates available as shown below:.
The expiration dates above range from November 11, , which was just 2 days away when this article was written; to January 18, , more than two years away. For every one of those expiration dates there is a list of available option strike prices that is similar to the one in the first diagram above, altogether there are over options for Apple stock.
Once you understand the world of options, all these possibilities are open. Stay tuned for future articles. If this piques your interest, check with your local center on option classes offered in your area. Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader.
Above is a small sample of the options for Apple stock for just one expiration date, December 16, The Strike column in the center of the chain lists the strike prices that are available.
The columns to the left of the Strike column refer to call options, while those on the right refer to puts. In this list that right is good through December Once you have paid for a call option you can buy one for the price shown in the Ask column, times , you then have the right buy the stock at that price no matter what the market price of Apple stock is at some future date between now and expiration. This will allow you to make money if Apple stock goes up while risking only a small fraction of the stock price.
If you own the stock, this is like a guaranteed stop-loss. Besides the options listed above that expire in December, there are other expiration dates available as shown below:. The expiration dates above range from November 11, , which was just 2 days away when this article was written; to January 18, , more than two years away. For every one of those expiration dates there is a list of available option strike prices that is similar to the one in the first diagram above, altogether there are over options for Apple stock.