Basics of Stock Options for Beginner Traders

If you think that politics is a jungle, then you have not been in the stock market yet. With terms such as strike price, options, in the money, bullish, bearish and puts or calls, it is not something that you want to mess around with.

However, when you know the basics of stock options and find a platform that will help make the trading easier, one can conquer the world of stock market trading.

Stock options are quite popular because they offer traders a fast way to earn income. Options however are risky and tend to be aggressive. If traders abuse its use, the potential for losing huge amount of money is real. Knowing when to call and put options limits the risks that one faces and increases the income potential of the trader.The first thing that a trader should do is to understand what options are available. Options give the right to traders to buy or sell the shares but they are not obligated to do either. Buying options is different from buying stocks as Stocks gives one ownership whereas options gives one a contract to exercise the option. There are two types of options – “put” and “call” options.

Put options gives the trader the option to sell the stocks at a certain price or amount within the given period indicated in the contract. A call option on the other hand, gives the trader the ability to buy a stock at a certain strike price in a given period.

Once the trader gets to know these option types, it is time to track the performance of the stocks that the trader prefers. Several brokers offer platform tools to help traders check the performance of the stocks. In certain cases, technical analysis is offered as well. Technical analysis helps predict the direction of the stock prices by analysing the volume, past prices as well as market activity of the underlying stocks.

A trader needs to call or contact a broker to place the order or an internet based option- trading site. The most common mistakes for beginning traders are that they assume that stocks are sold per 1 share option. In reality, stock options are sold by lots of 100.

What makes stock options attractive to buyers is the fact that the trader who will purchase the option cannot lose more than the premium that was paid for the contract in lieu of the option premium that he paid.

As such, the risk of losing money is only equal to the amount that one pays for the contract. The potential earnings of the option contract however depend on how much the stock’s price is during the period when the trader wants to sell the options. The seller however assumes the responsibility and can lose more than the amount of the premium that they received.

For those who are interested in learning more about stock options, Whatifoptions.com is a web portal that helps traders test the different financial strategies and choose the best one that will suit their needs.