Options Trading Introduction Fundamentals & Examples: Options, Futures, Derivatives & Commodity Trading

Options Trading Introduction Fundamentals & Examples

In this article, we will cover the Introduction to Options Trading .

Options Trading Introduction, Fundamentals & Examples

Options Trading, might sound a big and tough thing for many people, but in reality, it is not that difficult to understand and not that problematic. All one needs to know is a few fundamentals and a few terms and they can as well start with the options trading. Options Training Trading

This article will be the first in the series for teaching options trading. Please note carefully that Options trading is NOT as simple as stock trading. Here one needs to be aware of the fact that options trading involves a lot of risk and the risk can be much higher than the returns. Hence, one needs to assess his/her situation well, to know what amount of risk they can take, what amount of loss they can suffer and how well they can place their bets, how well put their stop-losses and get out of lossing trades in time. Most important, options prices fluctuate heavily, with every tick of price movement, one also needs to know how and when to book their profits and run away.

What actually goes on in Options Trading?
This is the fundamental concept every option trader should be aware of (for that matter, anyone trading in any kind of derivatives - options, futures, commodities, swaps, etc.) should know very well of this concept - In Derivatives Trading, Money just moves from one market particpant to the other i.e., it might move from buyer to seller or vice versa. So one of them is in profit, and the other is in loss.

To understand this better, please compare it with the stock trading business:
- In stock trading, not all parties are at loss. Say for example, I may buy IBM stock in 2001 at a price of say 25 USD per share. After holding them for 3 years, I may sell them off at 50 USD per share, making a profit of 100%. The person who buys them from me at 50 USD, might hold them for another 3 years and then sell them off to someone else at 65 USD. Hence he also makes profit. The new buyer might hold it again till the price is profitable and then sell them off at a profit. So Stock trading allows you a freedom to hold stocks indefinitely (unless the company goes bankrupt - like Lehman Brothers case).

- However, in options or futures trading, one does not have this choice of infinite hold. All derivatives have an expiry and the trading in each such derivative is allowed only till that day. Hence, the time for options or future or commodity trader is limited, making the trading very very risky.

Given these limited time trading opportunities in options, futures, commodities and derivatives, it is considered only for the educated lot. Take the example of a bet. Say there is a football match between Manchaster United and Chelsea and you bet with your friend. You bet on ManUtd and he bets on Chelsea's win. So what is the lifetime of this bet? It is till the time the match ends. The moment the match completes, you have the final score and the bet is over. Someone looses, someone wins. The same thing goes on in Derivatives trading. For every winner, there is a loser. We will elaborate on this further in the next articles
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