In the world of finance, options trading has large potential rewards, but it also comes with high potential risks. Still, to the savvy investor, options trading presents a world of opportunities.
If you're new to options trading, the Options Industry Council is a good place to start learning the basics. So just what is an option? According to the site:
An option is a contract to buy or sell a specific financial product officially known as the option's underlying instrument or underlying interest. For equity options, the underlying instrument is a stock, exchange-traded fund (ETF), or similar product. The contract itself is very precise. It establishes a specific price, called the strike price, at which the contract may be exercised, or acted on. And it has an expiration date. When an option expires, it no longer has value and no longer exists.
Options come in two varieties, calls and puts, and you can buy or sell either type. You make those choices - whether to buy or sell and whether to choose a call or a put - based on what you want to achieve as an options investor.**
The Chicago Board Options Exchange (CBOE) also offers an excellent glossary of terms.
It's possible to generate income and manage risk with options. Still, educate yourself so that you'll understand the risks involved. This activity is not for the uninformed. The Options Industry Council provides some tips:
- Establish a goal.
- Know how to accomplish your goal. Read up on strategies.
- Choose a broker with whom you have confidence -- one that is willing to work with you on your individual investment plan. One size does not fit all.
- Find out what you're eligible for in your options agreement. Based on that agreement, your brokerage firm will certify you for a particular level of options trading.
- Complete an options agreement form and any other necessary paperwork.
- Watch the margins.
Read, read, read! The more informed you are, the more you'll improve your likelihood for success.
It's true that individual investors aren't feeling so confident these days. At the same time, however, Americans historically have seen themselves as go-getters and risk-takers.
When it comes to options trading, there is a time to be cautious, and a time to move forward. Investors who stay informed know the difference.