One of the
primary reasons investors choose to get into options trading is the potential
to generate profits regardless of whether the market is going up or down.
Another benefit with options trading is that you’re not actually buying any
assets. You’re not required to purchase any stock or currency. You’re simply
paying a premium for the option to purchase the asset if you choose to exercise
that option.
The premium you pay is often quite a lot lower than the actual cost of the stock
you’re speculating on. This makes option trading very attractive for small
investors and they’re able to enter the market with only a relatively small
investment.
Option Types:
There are two types of option contracts – Call options and Put options. A Call
option is where you have the right to buy the underlying stock if you choose to
exercise your option. A Put option is where you have the right to sell the
underlying stock if you choose to exercise your optional right.
The options contracts themselves can be on-sold to other investors, which is
where successful options traders generate their profits.
Types of Options Trading:
A Covered Call options contract is when an investor already owns a parcel of
stocks and wants to give someone the option to buy them at a fixed price at a
point in the future. The stock owner writes an options contract and an investor
buys the option contract. This allows the stock owner to receive a premium for
writing a covered call contract.
During the contract period, the price of the stocks goes up. The investor has
two choices – he can sell the option contract to another investor and keep the
profit or he can exercise his option and purchase the stock outright at the
discounted price.
A Naked Option trade is the more attractive investment vehicle for many small
investors. This is where you simply buy or sell an options contract without
ever buying or owning any stock of your own. Your sole aim as an options trader
is to buy options contracts and then trade them at a profit.
