Option Trading Basics

Options trading can increase the profits you make when trading Stocks if you understand how to use them and know what you are doing. Options can be a very useful tool that the average investor can use to enhance their returns.

This article - Options Trading Basics, looks at what options are and discusses some of the options trading strategies traders can use with these versatile instruments.

Options - An Overview

Options give the buyer the right, but not the obligation, to buy (a call option) or sell (a put option) the underlying Stock or futures contract at a specified price up until a specified date.

In other words, options are like tradable insurance contracts.

An investor can purchase a Put option as insurance against a decline in the Stock price or a Call option in case the Stock rises. Buying an option gives the purchaser time to decide whether they will buy or sell the underlying Stock. The price is locked in until the expiry date, which in the case of LEAPS can be years into the future.

Options trading has several advantages that every Stock Market investor should be aware of, such as high leverage, lower overall risk than owning the physical security, more versatility and the ability to generate extra income from a current Stock portfolio.

An option's value fluctuates in direct relationship to the underlying security. The price of the option is only a fraction of the price of the security and therefore provides high leverage and lower risk - the most an option buyer can lose is the premium, or deposit, they paid on entering into the contract.

By purchasing the underlying Stock of Futures contract itself, a much larger loss is possible if the price moves against the buyers position.

An option is described by its symbol, whether it