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Stock Option Trading Information
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What is meant by Stock Options?
When people hear about huge gains and losses in the stock market, what they’re often hearing about are stock options. Stock options are one of those financial oddities that many may have heard of, but few really understand.
To understand stock options it is important to understand the difference between them and actual stocks. When an investor buys stock in a corporation, she is actually buying partial ownership of that company. She is considered a stockholder and may vote at the shareholder meetings, and will be paid dividends when the company shows a profit. When buying stock options, however, the investor doesn’t own anything tangible at all. All she’s purchased is the “option” to buy or sell specific stock at a specific price by a certain date.
Because of their speculative nature, stock options are one of the riskiest aspects of the stock market. The investor is essentially gambling on what the value of the stock is going to be. In the case of a buy option, for example, the investor benefits if the stock’s price rises above the option price. Obviously she’s making money if she is able to buy stocks at $20.00 per share when they’re trading at $30.00 per share because she can immediately sell the stocks she’s purchased for a tidy profit. In the case of a sell option she’ll want the stock price to drop, enabling her to sell shares at $30.00 per share when they’re trading at $20.00.
When things work out this way, the investor is one happy camper. Of course things don’t always work out this way just like you don’t always get dealt a ten when you double down on an eleven. Sometimes you do, but many times you get a three. When the best laid stock option plans go awry, people lose money.
Stock option trading has the potential to make a lot of money very quickly for investors, but it is advisable to steer clear of options unless you’re a seasoned investor with experience and the ability to bounce back from a major loss.
Additional Resources for Stock Option Trading
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