Trading Stock Options: A Simple Guide for Beginners

Never put all your eggs in one basket—this is one unwritten rule in the financial market. Diversifying your investments lessens the risk of losing all your money on a certain period due to market fluctuations. Usually, investment portfolios include a variety of securities such as stocks, bonds, properties, and mutual funds. To expand your investment portfolio, consider trading stock options.

What are stock options?

Stock options are agreements between two parties that give the stock option buyer the right to purchase 100 shares of a stock at a fixed price from the stock option seller within a certain period. The holder has the option not to buy a certain asset if its value drops.

There are two types of stock options trading: the call options and the put options. Call options allow the holder to buy an asset at a fixed price on or before a certain date. Call options buyers get more profits if the price of the stock they purchased has increased before its expiration date. Put options allow the holder to sell an asset at a fixed price on or before a certain date. Unlike call buyers, put options buyers benefit more if the value of the stock drops before it expires.

Stock options trading vs. stock trading

Don’t confuse stock options trading with stock trading because these are two entirely different investment methods. When you invest in stocks, you get to own a part of a publicly listed company. In contrast, options always involve a transaction between a buyer and a seller.

Trading stock options offers more benefits than other investment types. One of the best benefits of options trading is the unlimited possibility of profits with limited risk in just a short time. It also gives the holder more flexibility to invest in particular market outcomes. However, options trading can be very risky especially for beginners and for those who are not careful enough with their investment decisions.

If you’re interested in trading options, it’s recommended that you take options trading courses to know more about how to succeed in this type of investment.