Beyond all 'hype' what is it that makes option trading so good?
This is a question that I wish more people would ask, but thing is not too many people know they even exist!
The main reason that I love option trading is that options provide opportunity to turn a small or modest amount of money into a large amount of money quickly!
How is this possible you might ask?
Well before I get into 'how' that let me show you exactly 'what' options are.
Options are simply 'contracts' that give buyer right or choice (but not obligation) to buy or sell shares in a particular company, at an agreed price, on or before a set date.
Now thing is, as an option trader I am not interested in buying or selling stocks, I am only interested in buying and selling options on stocks.
I want to buy an option for one price and then onsell it to someone else for a higher price and make a profit before option expires.
Now whether or not I am able to do this depends on two main things:
1) Whether underlying stock (the stock that option is concerned with) goes UP or DOWN in price.
2) The type of option that I have bought.
Now, there are 2 types of options, CALLS and PUTS.
Call options give us right to BUY shares in underlying stock.
PUT options give us right to SELL shares in underlying stock.
As I said before, we are not interested in buying or selling underlying stock, only in making a profit by buying options (on a stock) and then onselling those options to someone else for a profit.
However, only way we can make a profit is if option itself increases in value.
So What makes options go up or down in price?
CALL options increase in value when underlying stock goes UP.
PUT options increase in value when underlying stock goes DOWN.
This may sound confusing if you are new to option trading, but basically what we want to do is to buy CALL options on a stock when we think it is about to go UP in price or buy PUT options if we think stock is about to go DOWN in price.
If we are right and stock moves in our desired direction, UP for CALLS or DOWN for PUTS, we will make money.