Options trading isn’t the easiest subject to understand if you are a complete beginner. The world of finance is complex and options trading is I am afraid to say at the sharp end of investing.
If you do not know what you are doing then you can quickly lose your shirt with this form of investment. The reason people like this way of trading though is that if you do know what you are doing then you can make huge profits very quickly. People can double (or more) their money in a matter of week.
I have put together this article so that hopefully you get the basics of this way of trading. To start off let us look an accurate description of options trading as it actually is
A Description Of Options Trading
Description: An option is the right, yet not the obligation to sell or buy an asset (be it futures, commodities or perhaps currency) at a fixed price before a predestined date. This is a binding contract whose terms and properties have been strictly defined.
Look that may of not cleared things up entirely right? Well then let us look at things by way of an example to hopefully make things that much clearer.
An Example Of Options Trading
Right say you have seen a yacht (it is nice to dream) for sale for $300,000. The problem is it will be three months before you have the money in place. At this point you can speak to the owner and work out a deal to pay $4000 now with option to buy the yacht in three months time for $300,000.
What Happens Next?
In this example two circumstances could come about…..
Circumstance 1 – The value of the yacht could rise to a cool $2m because you find out that the boat was previously owned by a famous celebrity. This is fantastic for you because the owner of the yacht has to still sell you the yacht for $300,000. This means a profit of $1,696,000 ($2 million - $300,000 - $4,000) just like that.
However what is more likely to happen is…….
Circumstance 2 – The value of the yacht could be worthless. You have the yacht checked out and she proves unseaworthy with many leaks and serious flaws in the hull. As you have only bought the option to buy it you are under no obligation to physically purchase it. In this scenario you only lose the initial $4,000 the price of the option.
So How Does This All Come Together?
Well it all comes to two factors you have to consider:
Factor One – Just because you buy an option there is no obligation to go ahead a purchase; it just gives you the right. If you decide against a purchase the option will expire and at that point it becomes worthless. All you lose is the original investment.
Factor Two – An option is simply a contract that deals with an underlying asset. That is why in the world of finance we call an option a derivative; what this means is an option derives its value from something else. In the example we have used the yacht as the underlying asset but in finance in can be stock, commodities or currency.
Conclusion – Options Trading
The example we used here was to give you a tangible grasp of options trading using a real world scenario. Options trading is a very complex form of trading but can be done by an individual and many people make a living online option trading from home.
To learn more about visit the site Options Trading 101.
Thanks for posting this awesome guide which helped me in learning so much options trading. At first glance option trading seems to me very complex but after reading so much about it I really wanted to try it.
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