Note: This article contains affiliate links. I may receive compensation for qualifying purchases.
What are stock options? This is a question I am commonly asked. There are not many people who actually fully understand what an option is. By the end of this article though, you will be one of the few who do understand.
Stock Options Explained
A stock option, option for short, gives a trader the right to buy or sell shares of a company at a specified price known as a strike. Now, the trader is not obligated to buy or sell these shares until expiration of their options contract. Yes, when you buy or sell an option you are entering a brief contract. You as the trader can decide the length of the contract. I personally prefer monthly options contracts as the premium tends to be higher and I have more control over the position. Now I am sure you are wondering what a premium is. It is the income you receive when you sell an options contract. Back to what options are.
Types Of Stock Options
There are two forms of options, puts and calls. If you are to begin trading options, then you MUST understand what these are. A put is an option that is obtained by a buyer or sold by a seller that allows the trader to sell 100 shares of stock at a fixed price. A call is an option that is obtained by a buyer or sold by a seller that allows the trader to buy 100 shares of stock at a fixed price. I will be writing full blog posts on both of these options types as they cannot simply be explained in 1 short sentence. Do not fret if you are lost! Options can be very confusing when first learning about them. Here are the links to the articles containing the information about puts and calls.
I highly recommend checking out the articles on puts and calls! They will really help you get started. In addition to those articles, I recommend that you do some research on your own. Here are some books I recommend you check out:
Getting Started in options: This book is incredibly useful and it is full of examples that will really teach you the ins and outs of options trading. If there is any one book you purchase to learn about options trading, then let it be this one.
High Probability Trading: I will admit, this is a long read. This book does make clear the skills you need to make successful trade though, so it is well worth it. It does not specifically relate to options trading, but you can easily apply the methods to trading options. This book will help you become a successful trader even if you do not trade options.
I hope this article has cleared up any confusion you may have. The articles on puts and calls will help you out, and the books will truly help you understand trading options. Do you have anything you would like to add to the article? Comment any suggestions you may have! Happy trading!