Options trading vs stock trading

Join the NASDAQ Community today and get free, instant access to portfolios, stock ratings, stock alerts, and more! Many traders think of a position in stock options as a stock substitute that has a higher leverage and less required capital.

After all, options can be used to bet on the direction of the stock price, just like the stock itself. But options have very different characteristics than stocks, and there is also a lot of terminology the beginning option trader must learn. The two types of options are calls and puts. When you buy a call option, you have the right but not the obligation to purchase a stock at the strike price any time before the option expires.

When you buy a put option, you have the right but not the obligation to sell a options at the strike price any time before the expiration date. Differences Between Stocks And Options One important difference between stocks and options is that stocks give you a small piece of ownership in the company, while options are just contracts that give you the right to buy or sell the stock at a specific price by a specific date.

It is important to remember that there are always two sides options every option transaction: So, for every options or put option purchased, there is always someone else selling it.

When individuals sell options, they effectively create a security that didn't exist before. This is known as writing an option and explains one of the main sources of options, since neither the associated company nor the options exchange issues options. When you write a call, you may be obligated to sell shares at the strike price any time before the expiration date.

When you options a put, you may be obligated to buy shares at the strike price any time before expiration. Trading stocks can be compared to gambling in a casino, where you are betting against the house, so trading all the customers have an incredible string of luck, they could all win.

But trading options is more like betting on horses at the racetrack. There they use parimutuel betting, whereby each person bets against all the other people there.

The track simply takes a small cut for providing the facilities. So, trading options, like the horse track, is a zero-sum game. The option buyer's stock is the option seller's loss and vice versa: Some More Basics Of Options The price of an option is called its premium. The buyer of an option cannot lose more than the initial premium paid for the contract, no matter what happens to the underlying security. So, the risk to the buyer is never more than the amount paid for the option.

The profit potential, on the other hand, is theoretically unlimited. In return trading the trading received from the buyer, the seller of an option assumes the risk of having to deliver if a call option stock taking delivery if a put option of the shares of the stock.

Unless that trading is covered by another option or a position in the underlying stock, the seller's loss can be open-ended, meaning the seller can lose much more than the original premium received.

You should be aware that there are two basic trading of options: An American, or American-style, option can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style trading all stock options are American style. A European, or European-style, option can only be exercised on the expiration date. Many index options are European style. When the strike price of a stock option is above the current price of the stock, the call is out of the money and when the strike price is below the stock price it is in the money.

Put options are the exact opposite, being out of the money when the strike price is below the stock trading, and in the money when the strike price is above the stock price. Note that options are not available at just any price. Also, only strike prices within a reasonable range around the current stock price are generally traded. Far in or out-of-the-money options might not be available. All stock options expire on a certain date, called the expiration date. For normal listed options, this can be up to nine months from the date the options are first listed for trading.

Longer-term options contracts, called Trading, are also available on many stocks, and these can have expiration dates up to three years from the listing date. Trading officially expire on the Saturday following the third Friday of the expiration month. But, in practice, that means the option expires on the third Friday, since your broker stock unlikely to be available on Saturday and all the exchanges are closed.

The broker-to-broker settlements are actually done on Saturday. Unlike shares of stock, which have a three-day settlement period, options settle the next day. In order to settle on the expiration date Saturdayyou have to exercise or trade the option by the end of the day on Friday. Conclusion Most option traders use options as part of a larger strategy based trading a selection of stocks, but trading trading options is very different from trading stocks, stock traders should take the time to understand the terminology and concepts of options before trading them.

In Part 2, we go over some of stock important factors that affect the value of an option; we will also discuss how you options find out if an option is cheap or expensive. Enter up to 25 symbols separated by commas or spaces in the text box below. These symbols will be available during your session for use on applicable pages.

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