Posted on 15 February 2012.
Trading options is a great way to diversify a portfolio, but traders should educate themselves in options trading 101 before they attempt to dive in head first. Certainly, a lot of money can be made by trading options, but large sums of money can also be lost. Since options trading can be so risky, traders need to be sure that they know what they are doing before involving themselves in it. The trading of options can open new worlds for investors, but those who are successful will have an edge when it comes to education and knowledge.
Options trading is a form of securities trading. Trading options is very similar to working in the futures markets, but options differ from futures in a couple of important ways. First and foremost is the fact that options do not obligate investors to buy or sell an underlying asset or security once the terms of an agreement have been met. Options give people the right to buy or sell, but individuals are free to make any decisions, which they feel will give them a financial edge.
The second major difference between futures and options is the fact that options are derivatives. This means that they do not have value by themselves, but through relationships with an underlying security. In other words, an option does not hold value on its own, but value is assigned to it based upon its association with a particular stock. For example, options on the stock of company XYZ are valued based upon the value of the actual XYZ stock, though they hold no intrinsic value on their own. This concept is confusing to many investors, but it becomes much simpler to understand after learning from options training 101.
Investors looking for new ways to earn money should investigate the options markets. Though options trading can be dangerous for novices, the basic concepts can be understood with a bit of education. Like many aspects of investing, engaging in options trading comes with great risks, but it also offers tremendous rewards, especially to those who have learned from options trading 101.
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