What is Options Trading?

Question

I invest in stocks and bonds now, but I don't know what options are or how they're traded.

Answer 1

They trade a little different than stocks or bonds because you do not have to put all the money up front for a contract. And they come in 2 flavors PUTS (the option or right to SELL a stock in the future at a stated price) and CALLS (the option or right to BUY a stock at a price in the future).

You either have to pay (if you are purchasing an option - LONG) the Asking Price or receive the Bid price (if you are selling the option - SHORT).

Similar to Bonds Options have expiration periods. You may hold them until expiration or SELL (trade) them early based on price swings.

They can be very complicated for new investors and I recommend doing A LOT of reading about them first before ever entering into an option contract. They have GREAT potential upside versus the investment price but you can also lose EVERYTHING!

I have provided some links to start you on your way....

Answer 2

Options are contracts that give the buyer (holder) the right to buy (if it is a call option) or to sell (if it is a put option) something for a certain price for a set period of time. The seller (writer) of the option receives payment from the buyer, and in return accepts the obligation to fulfill the contract if the holder chooses to exercise his right.

See

http://www.cboe.com/LearnCenter/Tutorials.aspx

for a short tutorial on how they work.

Answer 3

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