16Before you consider buying stock options, you need to understand what they are. In short, options resemble contracts in which the owner can purchase or sell the main security (with obligation) at a certain point in time (on that date or beforehand) with a certain stated price. So, what does buying stock options involve and what can you do with them? You have the right to purchase or sell that underlying security of the option. You are allowed to trade your options. You may even hedge against a loss by using your options.

Principles of Stock Option

Buying stock options are often confusing for beginners. Let’s look at an example. Let’s say that you think that a certain stock is going to gain value, but you don’t want to buy it just in case it doesn’t rise. You can purchase a call option for around the current market price, and it the stock does rise before the expiration date of that option, you now have the option to buy the stock at its lowered price.You can then hold on to that stock or even sell it and make a profit (minus taxes, commissions, and the cost of the option).

Stock Option Trading Tips

Often, puts are used as insurance by someone who holds the underlying stock. A put allows them to sell their stock at a guaranteed price if it sinks. However, you can also buy puts even if you don’t own the stock. If you buy a put on a stock which guarantees you the right to sell a stock at $80, and the stock sinks to $60, then you can buy the stock on the market and exercise your option, thus earning an instant $20 per share profit.

And it is easy to see why 80% of the time you will lose money when you buy an option. Because to make money from buying stock options trading you need to be able to pick the direction stock is moving correctly. And remember actually to make money on the directional trade the movement of the stock needs to significantly move in the direction you have predicted.