What Is Options Trading

Before we can answer the question what is options trading  you need to know what what an option is with regards to trading the markets ?

Many people who are interested in options trading are confused as to what they are. The common question asked is, what is options trading? In this article I will explain what an Option is by using an easy to understand example.

First off, an option is exactly that, and option, a choice, if you have an option to do something then you have a choice to do that something.

In a financial sense an option is a right to buy or sell a stock or commodity at a predetermined price during a specific time period.

So if you own an option you have a choice of either, buying selling or keeping it, you initially buy that option or that “right” from someone else.

Let us look at an example then we can clearly see what is options trading. The best analogy to use when describing an option is real Estate. So when some one asks us what is options trading we can answer with this example.
Say there is a vacant block of land just outside of some small town, that vacant land is worth about $250,000. You do a little research and discover that in the next few years Wall Mart is going to build a huge store across the road and that there is government plans for a school and developers are going to build a huge shopping complex in the town, in time that vacant block will be worth more than the current $250,000, so you go to the owners of the vacant block and say “Can I have the right to buy this block of land for $260,000 within the next 12 months?” the owner then says to you “ yes you can have the right to buy this land for $260,000 but you’re going to have to leave $15,000 for me to grant you that option “right”.

That $15,000 you are paying the owner to is a form of compensation to him because he is giving up an opportunity to make a profit from that land in the next 12 months, the risk is with him if the land goes up say to $350,000 in the next 12 months so the $15,000 is a form of compensation.

This compensation is justified, let’s say that 4 months after you pay the owner that compensation, the owner also discovers the same as you have about all the development in the area and Wall Mart wants the vacant block of land, they approach the owner and offer him $500,000 for the vacant block, he says “sorry but I cannot sell it to you because I have given some one else the option to buy this land in the next 12 months” Wall Mart then approaches you for the land, you exercise the option or “right” from the owner and buy the land from him for the agreed $260,000 and then immediately sell it to Wall mart for $500,00 your profit? $240,000 and it only cost you $15,000.

What would happen though if the land value of that block actually decreased, say for instance that it was discovered that the block of land was on top of an old contaminated junk yard, and that developers had decided not to build any new Shopping complex, Wall Mart built somewhere else and there will be no new schools built there?, the land is now re-valued at $100,000
The owner now comes to you and says, “Hey I want you to buy that vacant block of land from me for the agreed $260,000”, you say, “No way I’m not interested, I don’t have the “obligation” to buy it, I only have the “right” to buy it and I’m choosing not to exercise that right, at this point in time”.

By doing this all you lose is that $15,000 you gave the owner at the end of the 12 months or when you chose to exercise that right within that time, but the owner has taken all the risk and is stuck with the now very undervalued block of land. We hope now you have your what is options trading question answered

So what is Options trading about? it is about the right or the choice to buy or purchase something.

This gives you an insight into how Options provide limited risks to a buyer but also how Options Trading provide the buyer with the control of assets with lots of value.

So by forking out a small amount for the option or “right” you can control an asset that has unlimited potential for profit and in turn when you exercise that right to sell you can make the enormous profit from it and the risk is only limited to the amount you put down for that “right”.

What is Options Trading in relation to other forms of trading? it is about minimising the risk of loss and maximizing the potential for profit that is what Options trading is all about.

And this is how options work, this is why they are attractive and why many people and financial institutions have made millions of dollars from trading in options.

Yet the real challenge is in knowing when to sell the option for a profit.

The examples above don’t happen often enough though, once again this is like the amount of times the markets break out of their trading ranges, it happens but not often enough and why most traders lose money because they buy options on the premise of something that is not likely to happen.

Thankfully we have the right strategy and tool at your disposal to do this, not only that but now that we have changed the rules we are no longer concerned with looking for the market to break out of the trading range, what we want to do is use the probability tool ( OptionCast ) to find out the likely size of the movement of an option within that range, which is what the professional, successful options traders and bankers have been doing for years using the mathematical formulas that driver OptionCast software.

So what is options trading? it is about one of the ways to make good money while keeping it safe.

What Is Options Trading