What Is Options Trading and Why Should I Do It?

What Is Options Trading and Why Should I Do It?

With the help of internet sensations like Dave Portnoy of Barstool Sports, leading the “Davey Day Trader Global” retail army of stock traders, day trading is making a comeback. 

According to an interview with Joe Mecane of Citadel Securities, retail investors account for nearly 20 percent of the stock market activity and about 25 percent of day trades. 

The most popular form of day trading involves exchanging binary options. You may be wondering, “what is binary options trading anyway?”

If you are interested, keep reading this guide to learn exactly what is options trading and why you should start looking into it today. 

What is Options Trading

Stock trading and options trading are two very different ways of trading the financial markets. Unlike stocks, options are considered derivatives because the price is derived from the underlying equity. Buying stock gives the buyer ownership of a company, whereas buying an option gives the purchaser the option to buy or sell depending on a few factors. 

There are two types of stock options: Calls and Puts. 

Buying a call gives the buyer the option of purchasing when the stock hits the strike price or the predetermined price you selected when choosing the option. Buying a put works the opposite – it gives the buyer the option of selling when the underlying stock crossing the strike price. 

Stock options are contracts that specify what type of agreement (buying or selling), at what price (strike price), and by what date (expiration date). This means options are time-sensitive and can expire worthless if they don’t reach the strike price by the expiration date. 

How Options Trading Works

Investors will pay what is called a premium for the right to buy or sell the underlying security. The premium is the price of the contract and determined by several factors, including:

  • Time to expiration
  • Stock price relative to the strike price
  • And volatility

Traders must consider all these factors when executing trades. Options traders will buy calls when they expect the underlying stock price to appreciate and buy puts when they believe the stock will depreciate. 

Stocks that experience heavy volatility or rapid price changes will have a higher premium than those with stagnant price movement because of those contracts’ liquidity. Professional options traders will have the knowledge and expertise to take advantage of these situations and earn a profit. They even have option trading communities where traders can get together and discuss potential opportunities.

Why You Should Start Trading Options

Trading options can give investors access to a larger amount of capital than they would if they were trading stocks alone – you would just need to pay the premium for the stock. With more capital, traders can gain more significant returns, like the trader who flipped $15,000 into one million trading options.

Investors can also trade options to protect or hedge their current stock positions from price corrections. For example, if a company has an earnings report, you may be worried about, you can purchase a put option as a safety net instead of selling out of your stock. 

Learn How to Trade Stock Options for Yourself

Learning how to trade options can give you a chance at financial independence, not having to rely on a single source of income. However, trading options can is also risky and can lead to significant losses. It’s recommended to learn more about options and how trading them works before jumping right into it.

To learn more about exactly what is options trading, consider taking an online trading program and learn the ins and outs of the market.

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