Trading Options For Profit
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There are two basic ways to earn income from options trading. The first is by purchasing puts or calls and making a profit by exercising an option. The second method is by writing puts or calls and collecting the premiums or income from the sale of the financial instrument. With the proper understanding and knowledge, either strategy can be used to build a tidy investment income. Before entering the market, you need to confirm your understanding of the terminology in the marketplace. You should also be aware of how much capital that you are willing and able to risk. You must also decide whether you will place the trades yourself, or work through a broker. A few terms that you will need to master include Call, Put, Writing an option and exercise price. A Call allows the buyer to purchase a stock at a certain price, prior to the expiration. A Put is the right to sell a stock at a particular price before the expiration date. In either case, the buyer doesn't have an obligation to exercise an option. The writer or seller of the option has the obligation to buy or sell the underlying stock if the option is exercised. The individual writing an option earns a premium for the sale. Most expire without being exercised. Options are traded on the major exchanges, just as stocks are traded. The price associated with an Put or Call is affected by the price of the stock. It is also affected by the number of days prior to the expiration of the option. Options trading is less risky than trading the associated stocks. Smaller amounts are typically placed at risk in any one trade. Still, understanding the factors that can affect the price and performance of the puts or calls is critical to successful income.