 Finance maze (credit: RambergMediaImages) |
First, you might be asking yourself, "What is Options Trading?" While options trading may seem overwhelming to the average person, it isn't. Options trading is a financial product that represents an agreement sold by the "option" party, to the other party, the "writer" party. The contract gives the buyer the right, with mutual agreement to buy or sell a security or other financial asset at an agreed price, scheduled date, or period of time.
Next, setting a contract in place between a buyer and seller should not be done without understanding the roles of the "call" and "put" options. The call options allow a party to buy at a particular price. In this situation, the buyer wants the stock to go up. Using a "put option" allows the sale at a certain price in which case the buyer wants the stock price to go down.
So, "Who participates in options trading?" You may already know the answer. The parties that participate in options trading are:
1. Buyers of Calls
2. Sellers of Calls
3. Buyers of Puts
4. Sellers of Puts
There are several reasons why an individual may want to use stock options as part of their financial portfolio. Stock options allow you to change your position based on any events in the market, your situation, etc. They allow you to be cautious with your funds or take a speculative stance. Finally, with the right buyer they allow you to protect yourself from a decline by being educated on the movement of a stock.
Moreover, some considerations when making the decision to do option trading. Some videos here will help: http://www.incomemaster.com/options-trading/. The first rule is to always ensure that the options are traded before the expiration date passes. If the date passes, the holder loses the premium, or money attached to the option. For sellers, such as a financial adviser etc. the biggest risk is that they must perform the trade when the owner of the stock indicates to do so. Thus, putting the adviser in a difficult position if the market goes against the buyer. Herein is where the risk and liability for the seller lies.
In addition, the next time someone asks you, "What is Options Trading?" Just remember there are also a variety of different tools and books that can be used as resources for the beginning trader. "Are you conservative or someone who will ride the market and potentially invest in risky stock that may or may not have a large gain?" Some popular websites such as incomemaster.com allow you to determine what are good personal trading strategies based on your personality, etc. Some examples of introductory books include, "The Rookie's Guide to Options," or "Stock Options for Dummies." These books provide some basic information and terminology on options trading if further detail is needed.
Finally, making good financial decisions with your assets is a critical decision to managing your money appropriately. Your flexibility is a big part of deciding whether option trading is a good choice for you. No one wants to play "Risky Business" but having the right financial professional on your side and making sound decisions can make the process less overwhelming. Your Grandfather's inheritance can be diversified several different ways, one including option trading should you choose. By doing so, you may have the choice to reap even greater rewards.
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