Learning Option Trading (2024)

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By Learning Option Trading You Can Profit Whether the Market Goes Up or Down

Learning option tradingmeans understanding what options are and how you can use them to enjoy consistent monthly profits.

Options are commonly known as"derivatives" because the changing value in options contracts are "derived"from the price action in another underlying market.

Options trading contracts are most commonly associated with companies listed on the stock market and their associated indexes; but you can also have options on commodity futures such as gold,silver, sugar, wheat or pork bellies, or on other financial instrumentssuch as currencies.

Whether we are talking about company shares, indexes, commodities or currencies,the upward or downward price trends can be analyzed on charts. It is a truesaying that "a picture paints a thousand words" and in the same way,charts can give us a visual representation of the movements in price, ina way that no amount of tabulated data can.

Charts are our best friendif learning option trading is our goal, because they help us to decidewhen to buy or sell, or what strategy to employ.

What is an Option?

Learning option trading for beginners starts with understanding exactly whatan 'option' is. It is a contract between two parties to exchange anasset for an agreed price, by an agreed time, called an "expiration date".

If you buy an option, youare outlaying a much smaller sum than you would for the full purchaseprice of the asset that the option covers. For example, you may have heard of someonehaving an option to buy land.

In this case, you would pay a few thousanddollars to give you the right to purchase real estate worth over a hundred thousand dollars, for an agreed amount and within a given time frame.

The person who buys an option contract now hasa legal right, but not an obligationto buy the 'underlying' asset by a given time.You can exercise thatright if you wish, or you can let it lapse, or expire.

Call Options

The same principle applies to options on shares. When you buy aCALL option, it gives you the right to "call" on the owner of theasset, to sell it (or them) to you at the agreed "strike price" up to an agreed expirationdate.

Learning option trading involves relating the theory to financialmarket examples, so let's look at one.

If you purchased a $30 October "ABC Bank" call option, you now have the right (but notthe obligation) to purchase ABC Bank shares for $30 up until thecontract expires date in October.

Now, imagine that at any time before the optionexpiration date, the daily market value of ABC Bank shares rose to $32. Thiswould effectively mean that you now have the right to purchasesomething for $30 and then immediately turn around and sell it on theopen market for $32, thus realizing a profit of $2 per share.

If you had purchased contracts that covered 1,000 shares, you have animmediate profit of $2,000, less the cost of the options, at the time the option expires. It shouldn’tbe difficult to see then, that the higher the share’s market value goesbefore the expiration date, the more valuable your call option will become.

As long as the market price is above the option strike price, the calloption contract is said to be "in the money" because it now has intrinsic value, not just theoretical, or 'time' value.

If you're intent on learning option trading, it is critical you understand this simple concept.

Put Options

On the other hand, you might think the traded price of a company share is going tofall. You may want to ensure that you can still sell your shares for atleast what you paid for them, or slightly below. So you take out a formof 'insurance' called a "put" option.

A put option gives you the right,but not the obligation, to sell (or put) your shares to someone else,for an agreed amount, by a given date.

Let’s take our ABC Bank example above and imagine that you owned1,000 shares that you purchased for $30 but before our October expirydate, the share price plummeted to only $26.

Normally, you would be looking at an unrealized loss of $4,000 (1,000 shares x $4 loss in share value). But if youhad also purchased $30 October put options, you have the right to sell(put) the shares back to the market for the agreed price of $30.

For a small cost, you haveavoided a $4,000 capital loss - so you would feel like you’ve taken out"stock insurance" which is what a put option really is.

So again, itbecomes evident that as the price of a share drops, a put optionbecomes more valuable. As long as the market price is below the optionstrike price, the put option contract is said to be "in the money".

After learning option trading, you're happy to realize that you can also profit from options when the underlying market isfalling.

Why Choose Options Over Other Derivatives?

Options have often been perceived as high risk and indeed, canbe, because their price can rise or fall rapidly as the "underlying"share price moves. If we want to learn option trading it is imperativewe avoid the traps.

If we learn how we can harness and tame this power,our perception of options as a trading vehicle can change dramatically.

Options, if used wisely, can actually be far less risky thansimply trading shares alone. Why? Because options pricing models contain the elementsof time (to expiration), probability of intrinsic value and price (movements).

Because options are not assets in themselves but only legal contracts with respect to assets, you can also either buy them or create them out of nothing, to sell them to the market.

When thesethree elements are understood and effectively combined, they provide awonderful flexibility that allows us to protect our trading positions,while at the same time, providing opportunity for the same profit thatwould ordinarily have come from ten times the investment capital neededto produce a return from investing in the underlying shares. This iscalled "leverage" - less dollars to produce the same profit.

If you caninvest a much smaller amount to produce a better profit, this leavesyour other capital free for other option investments, bringing even moreprofit.

You can implement some great option trading strategieswith surprisingly little capital and receive excellent returns. Learning optiontrading is best done the safe way! It's not rocket science. Just buying asimple call or put option with the hope of selling it for a profit canbe your express route to financial ruin.

With a little more education,you would be surprised how much better you can do, with much less stressand with the same trading capital.

One of the safest ways for learning option trading

is by understanding The Art of Adjustments.This is about how to fix losing trades by either changing theparameters of the trade or adding to existing positions.

The Trading ProSystem shows you how to approach option trading as a real business.Once you know what you do, you have a beautiful, low risk, lowmaintenance, flexible strategy which enables you to trade withconfidence. For more on this CLICK HERE.

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