The article below explains the benefits of option trading
Option Trading Much More Profitable Than Stock Market Trading
Investors often believe that stock market trading is the only way to make money. This is sound thinking when the market is moving upward, but not so beneficial when indices decline. As investors have been shown way too often, the market declines at a far more rapid pace then it ascends.
Numerous investors incorrectly think that stock market trading is the only method to achieve profitability. And while that line of thought is wonderful in a rising market, it does not provide a solution during a market slump. Many investors can attest to the fact that markets drop faster than they rise.
That is why deploying an option trading strategy can provide a profit opportunity no matter which way the market is headed. In essence for those with little knowledge about options, it is a derivative investment instrument that provides the right, but not an obligation, to purchase, or sell a stock at a specific price within a specific time period.
Unlike stock market trading, options can make money for you no matter which way the market is moving. The two basic tools that options use are calls and puts. When you feel bullish about a certain stock, sector or index, you buy a call because you expect it to go up in value. When you are feeling bearish about a particular stock, sector or index you buy a put because you expect it to drop in value.
Any investor can learn from an option tutorial. From this, one will learn first and foremost that options are wasting assets valuable only within strict time limits thus each option has an expiration date. They will also learn the fundamentals such as what is a strike price – which is the price the option sets to buy or sell the underlying stock.
When making a call, one gains the ability to buy a stock at a pre-determined price in the future without regard to the actual price of the stock at the time it is purchased. A premium from one cent to several hundred dollars is charged for this privilege.
When buying a January $10 Call on Stock XYZ, you are betting that the stock will be trading at a price greater than $10 by that January expiration date which is the third Friday of the month. The call option gives you the right to buy the stock then for $10 which would be at a discount.
A put option provides the investor a means of paying a premium for the right to sell a stock at a set price with no regard for its actual future price. For example January $10 puts on stock XYZ offer the right to sell XYZ at $10 before the January expiration date. The bet is that the stock will be trading at a lower price allowing the option to be sold at a profit.
An option trading strategy requires less money to start than does stock market trading. However it does require some knowledge but it also allows you to profit in any market. Unlike stock investing, especially buy and hold strategies, volatility is the markets is often welcome.
By Tom Garimentis
Published: 5/17/2008
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In addition, the put and call options can be securitized, with the option grantor providing appropriate security for the underlying options. Put options are also viewed as providing exit routes to the investor under certain circumstances. Try option trading for dummies.
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