Trading A Stock Versus Stock Options

Trading A Stock Versus Stock Options

There is a lot of difference between the purchasing of stocks and purchasing of stock options. The purchase of stock option means that you are speculating and hence betting of the direction of the market. Trading in options is very different from the simple trading of shares. It requires experience in order to move forward with the transactions and succeed. Those who are new into the field of trading should take some time to gain experience before the start trading of options.

The terminologies and the strategies of options trading are different from those of share trading. Anyone who wishes to trade in stock options should first aim to understand the terminologies involved and the strategies required. Options trading have two options, namely: puts and calls. When one buys a call option, then one has the right to buy the shares at the exercise price. But this purchase has to be done before the option purchased expires. Buying a call option only means that one has the right to purchase a share but is not obliged to do so.

In a similar manner, a purchase of put option means that one has the right to sell the share at the exercise price before the put option expires. Again the purchases of put option does not mean that the person is obliged to sell the share. The strategy is to buy a call option when one expects the price of the share to rise and a put option is purchased when one expects that the share price will deflate. Thus experience is mandatory to be successful in the trading of options. Only with experience one can speculate the direction of the market and use it for ones own benefit.
Trading A Stock Versus Stock Options

Stock option trading proves to be profitable only when one formulates a strategy which encompasses the complete process of buying and selling. The strategy should be based on a particular set of options. In requires proper understanding, practice in trading and experience in order to make it a profitable act. These requirements make it an activity only for those who are experienced and not for amateurs. It takes time for one to learn the strategies of trading and investments.

When one buys a stock it means one owns a part of the company. But purchasing of an option means that one has the right to purchase or sell the stock of that company before the option expires. Option trading is a “zero sum game”. A “zero sum game” is one where ones profit is another person’s loss. In option trading the profit of the buyer means an equivalent loss to the seller and a profit of the seller means an equivalent loss of the buyer. Hence, there is no positive or negative cost involved with option trading.

To make this a lucrative opportunity one must fully study the history and values of the company before purchasing or selling stock of the company. Practice, good strategy, understanding of market trends and experience in trading assists one in making option trading a very profitable opportunity.