Options Trading - The Basics

Options trading is one of the instruments of investing that gives an investor a choice when it comes to making maximum profits with minimum risk.

They can be used for a variety of reasons depending on your trading goals and styles, it may be a better trading choice than owing a stock.

An option is defined as a contract that gives the buyer the right to buy or sell an asset at a specific price on or before a certain date.

Option is one of the most diversified trading instruments available and can be traded with various financial instruments like stocks, stock indexes, currencies, futures, exchange traded fund, commodities and bonds.

It is a derivative as its value is derived from something else and in the case of an index option, its value is based on the index.

It is a security and constitutes a binding contract with strictly defined terms and properties and is a valid trading instrument, whereby the holder has the right, but no obligation to buy or sell the stock or financial instrument.

The buyer will pay some price to get this right called premium and the seller will have to buy or sell the underlying stock, if the owner of option decides to exercise their right.

- Option type as CALL or PUTStrike priceOption type as call or put Expiry date An option that gives you the RIGHT  to BUY the underlying stock/instrument at agreed price called strike price, before agreed date called expiry date.

The person who is selling you the call option carries the obligation to deliver you the instrument, if you decide to exercise your right.

An option allows you to sell the stock at agreed price called strike price, before agreed date called the expiry date.

The person who is selling you the put option carries the obligation to take the delivery from you of the stock, if you decide to exercise your right.

When you trade with stock options is more than simple stock is the leverage involved as options enable you to control the shares of a specific stock without tying a large amount of capital in your trading account.

The amount of capital that you are paying is a comparatively small amount comparing to the cost of buying the same amount of stocks.

It gives one the ability to invest a smaller amount of capital and control the stock and give the option trader the flexibility.

You can magnify profit when the stock moves in your favor.

One can make money based on a relatively small movement in the stock.

Certain income producing option strategies enable you to generate a monthly passive source of income and one of the most used strategies to generate passive income is to write covered calls.

The trader who wrote the covered calls may be forced to sell his stock when the options is exercised so use this only if you are willing to depart with the stock that you own.

There are various options strategies that give the options trader the ability to make money from all market directions with limited risk exposure and potentially unlimited profit.

One can buy call options when the market is bullish, buying put options when the market is bearish and entering into various credit spread strategies to earn profit when the market is range bound.


Stock options can be used as an instrument to hedge against various risk exposure of a stock holder and as insurance to protect your stock portfolio from any adverse move in the market.

Unlike stock where you can hold on to it for many years or even passes on to your children, all options have an expiration date and there is nothing you can do to stop the options from expiring.

 The rate of time value increases over time when the options get closer to the expiration dates so be sure to watch over your open options position and not to let it expired worthless.

If you hold onto a trade and are out of money at expiration date, then you may lose that what you invested in the options.


Leverage works both ways as it can help you earn profit in shorter time frame and can break your account in half that time just as quickly.

The risks of leverage is present when one is involved with calls or puts or entering into any unlimited risk option strategies.

Options trading is a risky venture and it has substantial risk and reward involved and you need to trust your instincts and do what you feel is the best for you so that you achieve your financial goals without any losses.

Financial Markets - An Overview

A financial market or a capital market is a part of the financial sector where people trade shares, bonds, derivatives, securities, commodities, and other items of value at low transaction costs and at prices that reflect supply and demand. 

 Securities include stocks and bonds, equities and commodities include precious metals or agricultural products.

These markets are the place where businesses go to raise cash to grow, enabling companies reduce risks, and giving investors and shareholders an opportunity to make money. 

It is the true economic center of the country, where major financial transactions are carried out and millions of people are affected by the trading that goes out on the trading floor.

Everyday, stocks, futures, options, and bonds are traded and one will find both domestic and international corporations that are traded on a stock exchange daily and the money involved in these trades does not go directly to the trading companies listed.

A share or stock is defined as a portion of ownership in a given company and most stock holders do not own major stakes in a company to play a role in the management of the company.

Stockholders can purchase stocks, so that their investments rise in price, and those stocks can be sold at a profit at the right time.

Futures trading can be defined as a trading instrument that can be used for trading grains and other agricultural products.

It is a financial contract where you have to predict the future value of a commodity that must be delivered at a specific time in the future.

Commodities include oil, silver, natural gas, cotton and minerals that are bought and sold on a commodity exchange.

Futures contracts have a seller and a buyer and one can also can speculate on the contract depending on which side you are on and the contract states the price at which you agree to pay for or sell a certain amount of this future product when it is delivered at a specific future date.

 Most futures contracts are based on a physical commodity, but some futures contracts also are sold based on the future value of stock indexes.

You cannot take delivery or actually provide the commodity for which you are trading a futures contract but you can sell the futures contract you bought before you actually have to accept the commodity from a commercial customer.

Futures contracts are the contracts that can be used as financial instruments by producers, consumers, and speculators.

Bonds are loan instruments that allow companies sell bonds to borrow cash.

If you buy a bond, you are holding a company’s debt or the debt of a governmental entity and the company that sells the bond agrees to pay you a certain amount of interest for a specific period of time in exchange for the use of your money.

The difference between stocks and bonds is that bonds are debt obligations and stocks are equity wherein stockholders actually own a share of the corporation.

Bondholders lend money to the company with no right of ownership however bonds are considered safer, because if a company files bankruptcy, bondholders are paid before stockholders.

 Bonds act as a precaution and not actually a part of the trading world for position traders, day traders, and swing traders.

An option is a contract that gives the buyer the right, but not the option, either to buy or to sell the asset upon which it is based at a price specified in the contract on or before a date that is specified in the contract.

Before the options period expires, a purchaser of an option must decide whether to exercise the option and buy the asset at the target price.

 If the options buyer decides not to buy the asset, his or her initial investment in the option is lost. Options also are called derivatives.