Options Trading Overview

If you, as an investor, are willing to accept a higher degree of risk of monetary loss in exchange for a potentially higher monetary reward, options trading may be for you. Before diving in, though, there are some basics you need to know. Options trading isn't for everyone - primarily you need to be able to absorb the financial risk and mental stresses. Generally, investment professionals recommend that traders only invest a relatively small percentage of their overall portfolio in options.

When dealing with stock, there is really only the price factor to worry about. You either buy the stock "long" at a certain price, thinking it will eventually go up, or you sell the stock "short" at a certain price, thinking it will eventually go down in price. The quicker the price moves, and if it moves in the direction you think, the more money you will make, because if you're right, you can take your profit and reinvest. The key word here is 'eventually' though. With options trading, besides price, another factor is thrown in, and that factor is time.

Option aren't like owning stock, as there is no equity ownership in a company. Option instead represents a right to buy a certain number of shares of stock within a defined period of time. Time decay then is the additional risk factor in option trading. You not only have to be right about the direction of a stock's price, and the amount it will move, but also the time period in which the move will take place.

So before making the leap to option trading, you will need to understand how time decay and overall market volatility affect option pricing. Buy books, software, set up practice trading accounts, and whatever you need to learn everything. Above all, be cautious, and understand both the risks and rewards.

Still think options are risky? Discover how you can protect your investments and multiply your profits.

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