In order to understand what is "options trading" we must get into basic understanding of stock options. What are Stock Options? It is a contract between a seller and a buyer that gives the buyer of the contract the authority, but he is not obliged, to act on the contract before the expiry of the contract or before its due date in order to sell or buy the given stock at a previously agreed price.

How do the stock options work?

Take for instance that you have bought the stock option for the right to buy the shares of ABC company at say 10$. This means that in future if the stock price of the ABC company goes up to 100$ and you have the right to buy the shares of that company for mere 10$ ( tables can turn the other way around, but lets see the brighter part of it). We must keep in mind that buying a stock option is not the same as buying a stock of that company. It merely gives you the right to buy that stock share before the expiration of the contract.

Expiry of Stock Option:

Well the honeymoon period doesn't last forever. Unfortunately there is a expiry date after that you do not have any right to buy the stock of that particular at the previously agreed price. In the US markets on the third Friday of the expiration month stock options expire.

This is referred to as "Expiration Date".

It is a Derivative Product

Stock options are related to the underlying stock that is why it is known as a derivative. Many a time's stock is riskier than its stock options.

OPTION TRADING

The trading of the contacts of stock option over a stock exchange is known as options trading. More commonly it is termed as Online Option Trading.

In U.S.A there are six exchanges that facilitate trading in stock options. These are:

* American Stock Exchange
* The Philadelphia Stock Exchange
* New York Stock Exchange Arca in New York City
* The Chicago Board Options Exchange
* The International Securities Exchange
* Boston Options Exchange

We can broadly classify the options trading under 2 classes
* Put Options
* Call Options

Why opt for Option Trading?

Maverick investors like Robert G Allen and Robert Kiyosaki have greatly popularized options trading. They have themselves been very successful in options trading and hence promoted it also. So what is special with options trading?

* It gives unprecedented leverage
* It gives enormous flexibility in investment options

Recommended Reading:

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