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Options Trading Tutorial

Trading options is both similar to and different from trading stocks. Trading stocks offers many strategic possibilities from buying and holding a stock for the long term to a day trader’s use of technical analysis to make quick buying and selling decisions.In this regard,options and stock trading, are similar.

When an options trader is first starting out, he or she  needs to understand the basic difference between an option and a stock. An option is a “right to purchase” a particular stock over a period of weeks or months,and it expires on a specific date.The price of the stock itself can fluctuate, as we all know,over the expiration interval so there’s the usual volatility factor in market prices.

Options, on the other hand, expire on a specific date, so you’ll need to exercise them on or before that date. And there’s no rule saying you have to exercise your option if you choose not to. And you can purchase a stock for much less than it’s market price by purchasing an option.Options traders can leverage their trades.through an option, they can buy a $100 stock for a fraction of that price.This way you can purchase a stock for only a fraction of its market price,leaving you the money to purchase more stocks.This leverage makes options very attractive as an investment.

There are several different types of options. “American” options can be exercised any time before their expiration date, while ”European” options can only be exercised on the expiration date itself.and to make matters more confusing, where you purchase the option has no bearing on whether it’s American or European.The European options tend to apply to indexes whereas American options apply mostly to stocks and bonds. And most options expire the Saturday after the third Friday each month. But U.S. markets are closed on weekends, so “American” options expire on the third Friday of the month and ”European” options the following day.

An option is a contract that gives you the right to sell (a put option)a stock or buy (a call option) a stock on or before its expiration date.There are several strategic choices when you purchase an option. You can exercise it any time either before or on the expiration date.Or you decide not to exercise it and try to sell the option before the expiration date and recoup a portion of your investment. If you don’t exercise the option before it expires, you lose your investment.Let’s look at these situations more closely:

Let’s say you buy an option for Acme Chemicals Corp.You can buy a $20 stock for only a $2 options cost. Now most options contracts require a minimum purchase of 100 shares, so you’d have to pay $200 (for 100 shares) for the contract.Acme’s stock rises to $25 shortly thereafter and you decide to take your money and run, so you exercise your option. You exercise your option and buy the stock for $20, then you turn around and and sell right away it for $25.After you deduct the $2 acquisition cost per share, you’re left with a $3 profit, or $300 less brokerage commissions.That’s a conservative strategy, but a profitable one.And that makes you happy!

But consider the opposite scenario. But what happens if Acme’s stock price declines. What about the scenario where the stock falls below $20? If you sold your options for half of what they cost you, in this example,you’d only be out $100. Bear in mind that owning an option does not require you to purchase the stock. In this case, you can sell your option and recoup a portion of your investment. This is a lot better than if you had actually purchased 100 shares of Acme’s stock. You could exercise your option as soon as you can realize a profit or you could wait it out and try for a bigger profit any time before the expiration date. My personal recommendation is to take the conservative approach and you’ll more likely see consistently positive returns, but most likely not any big killings. But that’s just me. Higher risk, higher returns. Greater profits. And potentially greater losses.Just like most other investments.

This is just a basic example of how options trading works. It is more complicated than this and you should really educate yourself before you commit much of your capital to it. The best options trading trading tutorial I know is the one taught by David Vallieres, which you can review here and the video above from the free demo video series he provides. This course is the best in my opinion because Mr. Vallieres not only teaches you the basics but also shares with you his money making guidance.

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