Options as an Investment - How are stock options traded?

Various people have different investor profiles.  You can be conservative, moderately risky, or risky. It is important to have yourself evaluated by an expert financial planner or fund manager so you can properly match your investment portfolio with your profile. If you are looking into trading stock options, then you might be more of the risky investor type. 

If you finally decide to start trading options, there are several things that you can consider noting. Since the price of the stock option is 'derived' from the stock price, the pricing of the option will more or less move in direct relation to the stock price.  So monitoring price movement is something you might want to do. 

Secondly, it is important to educate yourself on what stock options are and how they work. Stock options are basically contracts that are 'bought' or 'sold' to a purchaser. These contracts give the purchaser the right to 'buy' or 'sell' that item for a specific price given a specific time period.  For example, the contract for Item A is being sold for $10. The value of Item A in the market right now is $100. You now decide to buy the contract to item A for $10. After some time, you realize that Item A has become a hit and is now selling for $150. You now decide to exercise your contract to buy Item A for $10. You have $50 more for the value of the item you just bought. 

Trading options is basically buying or selling contracts for something over a certain period of time. Buying is a "call" and selling is a "put", find out more about options calls and puts here.

For example, you saw a piece of land in your city valued at $100,000. You were informed that the value of that piece of land will go up because of the upcoming projects around it. So you decide to 'buy' an options contract that gives you the right to that land for $500. Given the value of the land, $500 isn't a bad amount to pay for something that's worth $100,000. 

After a year, the land value has tripled to $300,000 and is selling for $2,000. You now decide to 'exercise' the right to buy it if for $500, and then sell it for $2,000. That's a 300% increase from your original money. 

Let's play a different scenario. On the other hand, the piece of land could be along a fault line. Turns out, the projects around it won't push through, and people are now speculative about the area. You can sell the contract for $300. You lose $200, but that's still less than losing $100,000 (initial value of the piece of land).  

Just like any other investment, trading options entails risks and rewards. Depending on your risk-taking behavior, you can opt to buy, sell or let your options expire. 

Staging the trading process

Where does trading usually happen? Just like the stock market, the trade for options also happens in a 'market place' or an exchange. Nowadays, there are various trading sites that you can check out, such as the Chicago Board Options Exchange and the International Securities Exchange.  

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