what is "opitons" trading?

Question

i understand trading stocks but what does the options trading do? how risky is it? and where can i look to understand more about it? any info you can provide would be great.

Answer 1

Options are the right, but not the obligation to buy (or sell) stock at a fixed price for a certain period of time. For example, You could pay $200 (random number I made up) to buy 100 shares of Target at $50 a share by December. (expiration is always the third friday of the month) If Target goes to $55 before December, you just made $5 a share x 100 shares and minues the $200 you paid for the option. If the highest Target goes is $48 a share, then come the third week of December you lost your $200.

Answer 2

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lithium630 gave you an accurate definition of options on equities, but I am not sure that really answers your questions.

As well as options on equities (stocks) there are also options on indexes (such as the S&P 500), futures, interest rates, etc.

Different people have different uses for options when they trade them. Some, as dkwr14 indicated, trade them to gamble. Some trade them to hedge other investments, as form of insurance. Some trade them as investments unto themselves, trying to capitalize on the flaws in option trading models. Some trade them as ways to generate regular income, for example selling covered calls on stocks they own.

Every option (call or put) is a contract in which there must be a buyer and a seller. The buyer may choose to exercies the option, thereby buying or selling the underlying for a fixed price, or he may choose to let the option expire worthless. The seller, when he accepts the payment from the buyer for the contract, agrees to meet the obligation of the contract if the buyer decides to exercise.

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One of the great things about options trading is that you have a huge amount of control over the amount of risk. Option trading can be much safer, or much more risky, than trading stocks, depending on the strategy you use while trading.

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I suggest you start with the online tutorials and classes at

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

which are informative, accurate and free. If you then still want to consider trading options I suggest you read one or two good books on options. All of the books at

http://www.cboe.com/Institutional/Bibliography.aspx

are good. You should try to browse through some of them at a large bookstore, library, or at amazon.com to choose one with which you are comfortable. Two of my favorites are:

McMillan, Lawrence G.: Options as a Strategic Investment

Natenberg, Sheldon: Option Volatility and Pricing

Answer 3

It gives the (call) buyer the right but not the obligation to purchase the underlying stock at a predetermined price (the "strike price" ) prior to the option expiration date. The buyer is charged a premium for this right. The (put) seller of the option receives this premium. "Calls" represent the buyers' side the option. "Puts" represent sellers' side of the option.

The buyer's risk is limited to the amount of the premium. The buyer cannot lose any more than what he paid for the premium. The buyer may sell the option for more than he paid for it, less than what he paid for it, exercise the option against the seller or let it expire worthless and receive nothing for the option (losing the premium he paid).

The seller's initial risk participation in the option is limited to what he receives as a premium. Further UNLIMITED risk participation MAY include having the option excerised against him by the buyer requiring the seller to deliver the necessary shares to the buyer REGARDLESS of the market price of the stock.

There is a lot more to options than what I have explained here. This is just an basic answer without going into many specifics.

Answer 4

It's basicly a bet you make on what a stock will do. You purchase a "goal" in which a stock will make on a certain date. If the stock reaches that number on that day, you can double your investment, if it doesn't, then you loose your bet. Options are alot like horse racing.. Your odds of winning are very low.

Answer 5

lithium6 has it correct.