Options Trading Basics Review

Options trading basics overview. Let's take a look at the components of options trading and review 2 trades that produced over a 200% return on investment...

End Your Financial Worry Forever...

Before we move on to module 2 let's do a quick recap of Module 1: Options Trading Basics

• Definition of Stock Options: If you buy or own a stock option contract it gives you the right, but not the obligation, to buy or sell shares of a stock at a set price on or before a give date (time period). After this date, your contract expires and your option ceases to exist.



• Derivatives are another name used for stock options.



• Stock Options are contracts; they don't represent ownership in anything. They are merely contracts that grant you certain rights.



• Options trading (the buying side) can be defined as buying contracts that you think will increase in value and once they increase in value you will sell them at a higher price and pocket the difference.

1 stock option contract = 100 shares of a company's stock. So when you buy 1 contract you are buying the right to, buy or sell, 100 shares of that stock.

2 Types of Stock Options: Puts and Calls

The "Put option" gives its buyer the right, but not the obligation, to sell shares of a stock at a specified price on or before a given date.

The "Call option" gives its buyer the right, but not the obligation, to buy shares of a stock at a specified price on or before a given date.

• You buy a Call option when you think the price of the underlying stock is going to go up.



• You buy a Put option when you think the price of the underlying stock is going to go down.

For trading purposes, Puts and Calls expire the 3^rd Friday of the month of expiration. For example if I bought a December option, it will cease to exist (expire worthless) after the 3^rd Friday in December.

That's it for Module 1: Options Trading Basics. Before you leave don't forget to sign up for our option trading newsletter to get your free trading tips.

You can proceed to Module 2: stock option valuation whenever you feel you are ready.

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