Mark Lowe - Options Trading: Simplified – Beginners Guide to Make Money Trading Options in 7 Days or Less! – Learn the Fundamentals and Profitable Strategies of Options Trading

Beginners Guide to Make Money Trading Options in 7 Days or Less!

Learn the Fundamentals and Profitable Strategies of Options Trading

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Chapter 1 Getting Started in Trading Options

A n old Chinese proverb says that every journey starts with a single step. And here you are starting out on day 1 of your quest to learn all about trading options and making money in 7 days or less! Options are complex there is no getting around that and there is a lot to learn in such a short time and it's difficult to know where to start. But as this book is aimed at the beginner someone new to options and financial trading then starting with the basics is as good a place as any. So today on day 1, we will introduce you to the basic concepts and theory of Options, what they are, how they work for us and why we trade them.

By taking this journey one step at a time we will build your knowledge, chapter by chapter, with each subsequent chapter building on the concepts learned previously. By approaching the journey one step at a time you will learn and become comfortable with some of the complex theory, concepts and principles of options trading but importantly also learn the practical skills you will need to thrive in the Options market.

In This Chapter

You will learn:

• About why people are trading Options
• What are options?
• How did options come about?
• Comparing Options to other Financial Instruments
• Learn some of the key definitions
• Learn how options operate in theory and in practice
• How options are ultimately valued

Introducing Options

I n financial trading , an option is a contract between two parties that gives one party the prospective buyer - the choice between committing to a trade on a specific asset at an agreed price and at an agreed date and alternatively backing out of the trade. Therefore we can consider an Option to be a financial instrument that allows you the buyer to speculate on the market with low or at least identified risk. For example, as a beginner you may wish to test the water and so buy a stock option this is a contract based on the underlying shares of a company - with a view to buying the underlying stock at a set price at a later predetermined date. The beauty of the Option is that should your assessment of the market be correct you can exercise your right to buy the shares or take your profit.

However, should your assessment be wrong and you have misjudged the market trend then you can simply walk away with no obligation to buy the stock. For example, a call option would let you select an Option today that is set at a fixed price which will be available to you at a future date. This means that you can assess the current price of the stock and then choose an option with an attractive future price, which you feel will maximize your profits. But, importantly, you are under no future obligation to buy the underlying stock you can walk away for any reason.

Options are certainly not just tools for learning trading as institutional traders will use them regularly for what is known as Hedging where they buy options importantly not the underlying stock - as insurance against a turn in their market position. This gives Options several unique characteristics which makes them valuable tools for insurance against risk.

Moreover, trading in Options is not just about hedging and insuring against risk it is also a very powerful way to make money if you know what you are doing. Unfortunately many rush in without fully grasping the technical details of Options and subsequently make large losses. This is simply because options are at first complex to grasp and even though they may well be based upon stocks and shares the mechanics of trading is very different.

This common perception of complexity and higher risk makes a lot of beginners and intermediary traders avoid trading in options. But it doesnt have to be that way because trading options is actually a good place for beginners and intermediary traders to start out because if done correctly it can limit losses and risk while at the same time increasing the potential for profits. However, we must not underestimate the difference in the levels of knowledge and skills that are required to successfully trade in options.

What Are Options?

A n option is defined as a contract between two parties, which gives the holder (buyer) the right, but not the obligation, to buy or sell the underlying asset at an agreed fixed price at an agreed time in the future or in some cases at any time before the contracts expiry date.