Stock Options Trading
Stock Options Trading vs. Trading Stocks
Options can be used to bet on the direction of a stock price just like the stock itself however stock options trading and trading regular stocks have different characteristics. There are many terms that investors must learn about if they are interested in the options market. In today’s article we discuss some of these terms as well as some of the differences between stocks and stock options.
When stock options trading you must know what calls and puts are. If you buy a call option, then you have the right but not the obligation to buy a stock at the strike price any time before the options expires. If you buy a put option, then you have the right but not the obligation to sell a stock at the strike price any time before the expiration date. (The strike price is the price in which an underlying stock can be purchased or sold).
One major difference between stocks and options is that stock gives a small piece of ownership in a company whereas options are merely contracts that give the right to buy or sell the stock at a certain price by a specific date. As part of your trading education you should also learn that for every call or put option that is bought, there is always a seller on the other end. This is why stock options trading is considered a zero-sum game.
Stock options trading also requires the investor to write an option. This is how options are sold. Basically, when someone sells (or writes) an option, they create a security that didn’t exist before. Neither the company nor the options exchange issues options, only investors and stock traders.
Other terms that refer to stock options trading rather than merely trading stocks include the premium and LEAPS. The premium is the price of an option. The investor buying the option cannot lose more than the initial premium so the risk is never higher than the amount paid for the option. The potential for profit however is basically unlimited. The seller of the option on the other hand can lose more than the premium received. This is because the seller assumes the risk of having to deliver the option (call option) or take delivery (put option) of the shares of the stock. The investors must ensure that the option is covered by another option or a position in the underlying stock or the seller can lose more than the original premium received.
LEAPS are longer term contracts that are also available with many stocks. They can have expiration dates up to three years from the listing date. Typically, stock options expire within a time period of up to nine months from the date it was first listed.
