Options Trading for Dummies: Simpler Than Thought

It is a common misconception that options trading for dummies is a risky and complicated business. But it is in fact, much simpler than it is thought. The key for success in this lies in the understanding of the options itself. Knowing the amount of leverage in an option or the extent of loss in a worst case scenario can help anyone to have a safe trading experience.

At the very first of options trading for dummies, one has to know what an option actually is. It can be described with very complex terms. But simply, it is buying the right to sell or buy stocks by a certain date. Then there comes the types. There are two types of options, the right to buy a stock which is called a call and the right to sell a stock which is called a put. They both have their common as well as different characteristics. Most importantly, they are the buying or selling only the right of the transaction, not the obligation of the transaction.

The next step of options trading for dummies is understanding terms like strike price, expiration time and premium. The strike price is the price in which the stock will be sold or bought. It is defined during the purchase of the option. During the transaction the stock will be sold or bought at that price regardless of their then market price. The time of expiration is the time deadline in which the transaction has to take place or the right will be terminated. And the premium is the amount paid to hold the right until the expiration time.

The amount of gain or loss from an option trading can be measured by the difference between the strike price and the market price of the stock during the final transaction, if the option is not expired before the transaction. In that case, subtracting the premium paid from the difference between strike price and the market price is the total gain of the option buyer. This can be infinite in case of a call option but limited to the range of zero to strike price in case of a put option. Similarly, this is the amount off loss for the options seller. In other case, if the option expires before transaction, the loss of option buyer is equal to the premium paid, which is also the gain of the options seller.

So, it can be said that, for options trading for dummies, buying options is much less riskier than selling as it can provide huge amount of gain while the risk of loss is only equal to the premium paid. Also, call option can be much more beneficial to the options buyer as it can provide unlimited gain to them in case of a successful transaction. On the other hand, put option is beneficial to options seller as it has a limit of zero to strike price for the gain of the buyer and to the loss of the seller.

Keeping the above knowledge in mind, options trading for dummies can be much less riskier and simpler than the common public thought.

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