By Michael Rosenhall<\/p>\n
The Concept of Options Trading<\/strong><\/p>\n To better understand the concept of options trading and how it functions, one should have a pretty good idea as to how stock trading functions in general.\u00a0 Options trading is just one of many types of stock market trading activities that many investors prefer over the purchase and sale of bonds, mutual funds and stocks.\u00a0 What traders need to remember is that options have characteristics that are extremely different from those of stocks.<\/p>\n The key difference between options and stocks has to do with ownership in the company that has issued those shares of stocks.\u00a0 Purchasing shares of stocks provides you with a small piece of ownership in that company.\u00a0 Conversely, options are merely contracts that have nothing to do with ownership in that they provide you with the ability to purchase or sell shares of stock by a specific date in the future and at a specific price.<\/p>\n The What, How and Why of Options Trading<\/strong><\/p>\n Options are classified as either \u201ccalls\u201d or \u201cputs.\u201d\u00a0 The difference between both of these is as follows:<\/p>\n – With a call option, you have the right (but are under no obligation) to purchase shares of stock before the option expires at its current \u201cstrike\u201d price.\u00a0 In so many words, you purchase a call option.<\/p>\n – When you purchase a put option, you have the right (but are under no obligation) to sell those shares of stocks before the option expires at the current \u201cstrike\u201d price.<\/p>\n When companies or individuals sell options, they are basically creating a financial instrument or security that had not existed prior to the sale.\u00a0 We refer to this as \u201cwriting\u201d an option.\u00a0 When you create a call option, you may at some point in time be under obligation to sell those shares before the option expires at the current strike price.<\/p>\n