Options can be a wonderful tool in your trading endeavors – if you understand how they work. Trading options can be a significant means of offsetting losses in your stock portfolio, extending profits and reducing your basis in selected stocks. The key is in obtaining the right option education. The proper training can show you the many ways that you can use calls and puts to bolster your stock market performance and increase your trading profits. Let’s explore why option education is important, not just for rank beginners but for seasoned stock market investors.
Profit and Fun
Is option trading a sheer gamble, or is it a sound strategy? Many people see the options market as a huge gambling house where traders place bets on specific market outcomes in specific stocks. They’re not exactly wrong. In many ways, when you buy and sell options, you are betting that the underlying stock with move in the direction you expect it to move.
The basics of option trading are easy to understand. Essentially, when you buy and sell options, you are buying and selling promises to buy or sell stock at a specific price within a specific time frame. To give an example:
If stock in XYZ Widget Manufacturing is selling at $10 a share on June 1 and you think the stock will go above $15 a share by August 30, you may buy a call option with a strike price of $12.50 and an expiration date of August 30. What you have actually just bought is a promise to sell you shares of XYZ Widgets at $12.50 a share sometime between now and August 30. If XYZ stock goes to $15 on August 10, you can exercise the call, buy the shares of stock for $2.50 below the market price and sell them at market price, making a profit of $2.50 a share, less the cost of the option and trading fees.
The process just described is rather simple and elegant, in comparison to some of the more complicated maneuvers you can use with option trading. And that’s where option education comes into play.
Our example makes a loss on the options market seem rather benign, but the fact is that a loss when you’re trading options can hit you hard. In general, an option trading contract controls 100 shares of stock, so in our example, the guy who sold us the call actually suffered a much larger loss than initially apparent. The option market is tempting because you can make almost obscene profits with a relatively small investment – but the potential losses can be devastating if you don’t know how to offset those losses.
Options courses that focus on trading strategies, especially risk prevention strategies, can teach you how to trade and back up those trades with other trades. The bottom line is that, when you treat option trading as a business rather than a game, you hedge your bets and understand that you’ll profit from some trades and lose money from others. The goal is to profit more than you lose.
The greater your understanding of the risks, tools and strategies involved in trading options, the more likely you are to profit when you start trading. Whether you’re just getting started or whether you want to increase your profits from trading, find a good option education company and learn all you can about using options to offset risk and increase profits.