How to Trade Options – Options Trading Basics

All investors should have a portion of their portfolio set aside for option trades. Not only do options provide great opportunities for leveraged plays; they can also help you earn larger profits with a smaller amount of cash outlay.

What’s more, option strategies can help you hedge your portfolio and limit potential downside risk. No investors should be sitting on the sidelines simply because they don’t understand options. 

What is option? 

An option is exactly that — it’s a choice (or option) an investor has when playing the stock market. It’s a securities contract, a “call” or a “put,” that gives you the right to buy (call) or sell (put) the underlying equity, index, or ETF at a predetermined price (strike price) during a preset time period (expiration date). 

You’ve already seen how options strategies work every day without realizing it. In fact, you probably have purchased the right to protect yourself against risk in some area of your life, such as home, health or car insurance. Those same principles can be applied to options trading.