Introduction to Options Trading

Our introduction to options trading is a comprehensive resource produced specifically for those that are considering trading options, but have very little relevant knowledge and experience. If you are completely new to trading options, then we would strongly recommend that you read this introductory section in its entirety before deciding whether it's the right form of investment for you.

Options trading is a relatively complex subject, certainly when compared to some of forms of investment such as buying stocks, and many people are put off by the very idea of getting involved. It's true that there is a lot that beginners need to learn about before actually getting involved and starting to trade options, but the time and effort required can be very rewarding in the long run.

Although it's a complicated subject, it's actually not that difficult to learn about the important fundamentals. Once you have an understanding of what options contracts are and the basic concepts of what is involved in them, the more complex aspects will make sense to you. Please see below for full details of what our introduction covers.

Definition of an Options Contract

Options are very different to a lot of other financial instruments such as commodities, stocks, and currencies. Although they are an asset in their own right, they are actually financial contracts that are based on other financial instruments. They are a form of derivative, meaning that they principally derive their value from another asset.

The asset from which they derive their value is known as the underlying asset or underlying security and options are basically contracts that allow for the future transaction of an underlying asset between the two parties of the contract.

Options contracts contain a number of terms relating to exactly what that future transaction will be. For example, they will state what the underlying asset is, what the price is, at what point in time it can be transacted at, and whether it can be bought or sold.

For a very more detailed definition, please visit the following page – Definition of an Options Contract.

What is Options Trading?

There are many different ways to invest and many different financial instruments that can be used for investment and trading purposes. Like all forms of trading, options trading has its own unique characteristics and, as we have already mentioned, it's somewhat more complicated than a lot of the alternatives. However, the basic concept is very similar to any other form of investment; the goal is to make profits through the buying and selling of financial instruments.

Although options contracts are one of the more complex financial instruments, ultimately the principle of investing and trading them is of course still to make money. In fact, options trading offers many different ways to make profits from the price movements of a range of assets and securities. Even though they aren't particularly straightforward when compared to simply buying stocks, the potential rewards can make learning how to trade options successfully very worthwhile indeed.

For an overview of exactly what is involved, please read the following page – What is Options Trading?

Why Trade Options?

The obvious answer to this question is to make money. For the most part, this answer is entirely accurate. However, given that there are much simpler ways to make money, it's reasonable to ask why anyone would choose to trade options instead of, for example, just buying stocks that are expected to rise in value.

There are actually a number of good reasons for doing so, because options contracts offer several advantages over other financial instruments. Options trading might not be for everyone, of course, but there is plenty about it that investors might find appealing when they discover just what the potential benefits are.

For a detailed explanation of what the advantages are, please visit Why Trade Options?

Risks Involved in Trading Options

While there are plenty of positives for trading options, it should be pointed out that there are also risks involved. Any investment comes with risk of course, and it's difficult, if not impossible, to make decent returns without exposing yourself to some form of risk. If you are going to be trading options, though, it's important that you are aware of the risks that are specific to this form of trading. These are not necessarily reasons why you shouldn't get involved, but it's a good idea to fully understand the potential downsides.

Please read our page on Risks Involved in Trading Options for further information some of the less positive aspects of this form of trading.

Where to Trade Options

Another important consideration for anyone that is looking to get involved with options trading is exactly how and where they will trade options. Although it's relatively easy to buy and sell options contracts on options exchanges around the world, members of the public cannot actually make their own transactions without the services of a suitable broker.

There are many, many different options brokers to choose from and these brokers come in various different types. One of the more important decisions you will have to make before you start is which broker you are going to use.

For more details on this particular subject please visit the following page – Where to Trade Options.

How Options Really Work: Pricing, Exercising & Settlement

In addition to knowing exactly what an options contract is and what its various characteristics are, it's also necessary to be aware of how they work. We have already explained that they are a little more complex than most other financial instruments and there are certain features that are especially important to understand.

In particular, the way they are priced using two components (intrinsic value and extrinsic value), how they can be exercised, and the ways in which they are settled are fundamental to options trading. In order to explain these aspects, we have produced a subsection that specifically covers the three elements of pricing, exercising, and settlement.

You can find out more information at How Options Really Work: Pricing, Exercising & Settlement.

Options Trading: Key Terms & Phrases

There are a number of terms and phrases relating to options trading that are frequently used, and beginners really should ensure that they are familiar with such terms. We have compiled a list of these important terms and phrases and included detailed explanations of what they mean and in what context they are used.

Terms covered includes liquidity, volume, leverage, margin, time decay, and options moneyness. For the complete list and the relevant details, please visit Options Trading: Key Terms & Phrases.