The trading of options is another way to invest your money. It is a way to leverage the amount of money you have to invest. With options you can put into practice what you think the market will do in the future. You can also use options to protect a position you may have in a stock. Options however are a very risky form of investment and you should not attempt option trading if you are not an experienced investor. You can stand to make a lot of money with option trading but you can also stand to lose a lot of money.

Options basically come in two forms. There is the call option which gives you the opportunity to purchase a company’s stock at a set price. For example if you buy a call option for ABC company at 60.00, then you have bought the right to buy that stock at 60.00 when the option comes due. If the price of the stock goes up above 60.00 then you stand to make money on your investment. A put option is just the opposite. It gives you the option of selling a stock at a particular price. If you bought a put option for XYZ company at 55.00 then you would have the option to sell that company stock at 55.00. You are hoping in this case that the stock price will go down.

Of course you are in no way obligated to act on your option that you have purchased. In the case of the call option discussed above, if the price of the stock went down to 55.00 instead of above 60.00 then it would make no sense to buy the stock at 60.00 when you could buy it at 55.00. In this case you would simply let the option expire with no action. The problem comes with the cost of buying the option. If you have paid 4.00 per share to buy the call option then you would lose that money. If you have bought the right to buy 200 shares, then you would be down 800.00 in this example.

The problem I have found with options is that there is a set action date. If you buy a call option for four months in the future you are anxiously watching that value of the stock over that period of time. Let’s say the stock fluctuates between 55.00 and 62.00 over the period of time that you bought a call option for 60.00. This is not out of the possibilities since stock prices do fluctuate. The date comes for the option to come due and the price of the stock is at 58.00. You then let the option expire and within two weeks the price of the stock escalates to 75.00. If you had bought the stock at 60.00, you would have had the choice to wait out the fluctuation and then when the price went to 75.00 you could sell and make 15.00 per share profit. However, because you purchased a option, you were locked into a particular date that required the correct thing to happen within that time frame. This is one way, you can stand to lose with the trading of options.

There are other discussions I will give concerning the trading of options and the strategies of making money with option trading. It is not all doom and gloom. If you work the strategy correctly, there are ways to make money with option trading.

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