How to trade options

Options are derivative financial instruments that are actively used in trading goods, securities and in transactions with foreign currencies. The option gives you the right (but not the obligation) to buy or sell the underlying asset at a predetermined price and in a predetermined time frame. If you use the options wisely, they can become both a means of insurance of operations in the stock and foreign exchange markets, as well as an independent source of your income.

Instruction manual

1

Get training in trading tools that are difficult to learn, such as options. Read the terminology, understand for yourself what the essence of options trading is, what they are and how they differ from each other. There are many options, but in order to profit, we are interested in those types that you can buy and sell at any time, having an expiration date and a selling price (strike).

2

Explore the features of Call (buy option) and Put (sell option) options and the differences between them. Remember that there are four main types of options transactions:

- buy a Call option;

- sell Call option;

- buy an option Put;

- Sell Put option.

3

To consolidate the training material, which you can find in the form of literary sources, consider an example of using the Call option for profit. So, let's say that at the end of July, when deciding to buy an option, you expect the pound sterling (GBP) to increase over the next month and buy a Call option for the pound sterling in the amount of $ 100 with the expiration of the option on August 23 this year and the price of strike, equal to 4800. This means that you paid a premium of $ 100 for the right to buy GBP at the price of 4800 in the indicated period. It comes on August 23 and you see that the price of the pound has risen to 5300. Since the option you bought gives you the right to acquire the underlying asset (GBP) at a price of 4800, you do it. Immediately selling a pound at a market price of 5300, you will receive $ 500. After deducting a premium of $ 100, you received $ 400 in net profit, which is 400% per month. As you can see, the benefits are obvious.

4

Analyze the situation if, in the described case, when the option expires, the price of the pound does not rise, but falls to a value of, say, 4300. In this case, you will incur real losses only in the amount of the premium paid when purchasing the option, that is, $ 100. You cannot lose a larger amount, because you are not obliged to buy the underlying asset at a price that is not favorable to you (an option is only the right to buy the underlying asset, but not the obligation).

5

With experience, you will be able to master more complex options trading strategies in which the risk of investment loss is minimized. However, to master all the methods of optional strategies, you will have to learn a lot.

Useful advice

Additional sources:

"Options", S. Vine, 2003.

"Trading Options, " M. Thomsett, 2001.

Options trading