Understanding Stock Options for Beginners

stock options 

Many wannabe traders think that stock options are stock substitutes that require higher leverage and lesser capital. After all, an option is used to bet on the direction of the stocks to either buy or sell at a specified strike price and date --- just like common stocks. But options have a  different characteristic, and uses terminologies that differ with common stocks. 

There are two positions in options: calls and puts. A call conveys the right, but not the obligation to buy a financial instrument at a strike price, before expiration. On the other hand, a put goes the other route. It conveys the right, but not the obligation, to sell an instrument at a strike price before expiration.

 How to Trade Stock Options for Beginners

Trading in stocks may be compared to gambling in a casino when you bet against the house. If you have a string of luck, then you have a strong chance of winning against the house. It may also be compared to betting at the racetracks, where all bets are placed in a pool. The winning bets share the pool based on calculated payoffs, otherwise known as the parimutuel system. The racetrack earns as it gets a cut for the use of the venue to trade.

In mathematical terms, winning in an options --- is nothing but a zero sum game of chance; and  like in  all betting games, you only play with monies that you can afford to lose - or you stand to lose your shirt. 

Photo credit:  stockoptionsonline.com

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