An Option is a contract that allows the owner to buy or sell securities at the agreed price in a certain period of time. The agreed price on your options trading will never get affected by the current price of the securities.
You can trade various securities with options, including stocks, bonds, currencies, and even commodities.
Two Types of Options
The first is a call option. Buying a call option gives means buying the right to buy securities at a certain price before the expiring date. If your agreed price is lower than the current price, then, you get profits.
Conversely, if your agreed price is lower than the current price when the security is trading, then, you do not get any profit but still have to lose the money you used to buy the option.
The second is a put option. A put option, you buy the right to sell your securities at an agreed price anytime before the expiration date. With a put option, you gain profit if the current price, when the securities traded, is lower than your agreed price.
The Benefits
Trading options bring you various advantages. The biggest advantage is you can get benefit from the value of the assets that you do not own.
Besides, it also allows you to use leverage. You only need to pay the cost of the option, not the whole price of the assets. If the price rises sometime after you buy a call option. Then you make a huge profit with less investment.
It also protects your investment from decline prices in the stock market. Once you are good at options trading, you can combine it to better protect your investments.
The Risks
All of those benefits mentioned above do not just come without any risks. The biggest risk from trading options is you are competing against very sophisticated traders or hedge funds. Your competitors spend all day analyzing the best options strategies.
Some of them hire highly educated people who even involve calculus to determine the best price of an option.
Therefore, in every condition, never sell a naked call option.