While stocks are pretty common, you must have heard of options too. Options, like foreign exchange or futures are forms of securities that you can invest and trade in the stock market. Options are considered based on normal stocks. Very much like futures, an option gives you the right, but not the obligation, to buy an underlying stock at a specified price at a specified date in the future. You earn a profit if the stock’s market value rises above the price by which you acquired your contract upon the agreement’s expiry. If the stock’s market value drops, then you lose your premium.
There are two forms of options: the call option and the put option. If you buy a call option, you are expecting your stock price to go up and you would prefer the put option if you expect the opposite, meaning you expect prices of your stock to decline. By this time, you must have seen the unique feature of options. You actually earn a profit regardless of whether the price of your stock goes up or down unlike other derivative instruments where you only earn a profit when the price of your stock rises.
Like most trading instruments, options trading are now available online. It is no longer necessary for you to leave your seat as you can merely log on to an online options exchange and conduct your business there. As an online options trader, your ultimate goal is of course maximize your profits and minimize your losses. But how do you do that? There are many ways which you can engage in. Basically, options traders utilize either hedging strategies or trading options.
Hedging strategies are used if you are not sure whether the price of your stock will rise or go down. In this case, you will opt to buy a Put option on your stock. If the price actually goes down, then you earn a profit, but if it goes up, you merely lose your profit. It is also important to remember that if you think your stock will go down, it is best to sell your stocks and earn a profit from it and just purchase put options.
Another strategies traders engage in are selling their options before it expires to buy the underlying stock, let their contracts expire or sell their options. Selling options is actually not a problem as there are agencies responsible for buying these options in order to maintain balance in the system. In conclusion, if you are risk averse but would want to maximize your investments, then online option trading might work best for you.
But of course, you have to equip yourself with as much knowledge as you can. You might want to join options forums so you’ll have access to valuable tips that you may not otherwise find in trading books. There are also various online options trading sites that offer free tutorials as well as membership in the exchange. Like most investments, you also need to be updated about the economy and the different business players if you want to buy options on stocks about their company. It is important to have a good gauge of which businesses to look out for and to trade on. Armed with enough information, you will be ready to expand your money through online options trading.