Stock Options Trading: The Risks And Rewards

Posted by Nick Niesen on November 8th, 2010

Trading stock options is the process where options on stock are traded instead of the stock itself. When you purchase or sell a stock, you are buying or selling an actual part of the ownership in that company. A stock option is a contract between two individuals or businesses. Stock options are another kind of security that can be bought, sold, or traded. These securities offer great versatility, and a trader can adapt their position according to the situation. Stock options can be made as conservative or as speculative as you want to make them. Stock options are a very complex security, and there is always the risk of a loss of capital no matter who tells you differently.

A stock option is simply a contract that gives a buyer a right to purchase or sell an underlying asset at a fixed price before a set date, but does not create an obligation for the buyer. A stock option costs you a price, and for that price you get the option to purchase or sell the asset if you decide to. If you purchase a stock option at a specific price and the price rises dramatically, you purchase the stock at the agreed upon option price, and you make the profit from the increased market price. A stock option can make a substantial amount of money for a trader if everything goes the right way.

Stock option trading can also have a number of risks involved, and the stock option market is speculative. The best advice is to only invest risk capital into the stock option market, and never place money you can not afford to lose. The two types of options are call and put options. A call option gives the option holder the right to buy the asset before a certain time. A put option gives the option holder the right to sell at a specific price before a specified date.

The rewards to trading stock options can be significant, but so can the risks involved. Money is made and lost every day on this market, so it is important to only use risk capital on the stock options market. By learning everything you can about stock options trading, you can minimize the risk while maximizing the profits from trading stock options. By knowing about the stock option market and what it consists of, you will increase your trading options and help to minimize your losses.

Copyright © 2007 Joel Teo. All rights reserved.

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Nick Niesen

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Nick Niesen
Joined: April 29th, 2015
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