I was talking to my wife this evening about some options for our savings, and told her that I thought we could learn option trading. The closest that either of us have come to the stock market was when she received some stocks from a multilevel marketing company where she and her parents were distributors.
The stocks were doing really well until the company did some very disreputable things and ended up being delisted from the stock exchange, and the stocks became essentially worthless. That wasn't a particularly bad experience, since she more or less considered the stocks a novelty, but it did show us how easily money can be lost if one isn't cautious.
Option trading was more or less created to help people like us, first time traders have a bit of confidence and learn the industry while still having the opportunity and potential to make some good money. To make it a bit easier to understand, let's say that my wife and I have $5000 that we want to invest. We work with a broker who gives us access to some options. One of those options is a contract to buy 1000 shares of stock for a company out of Hawaii called Taro, Inc.
The contract states that for $200, we can own the option to purchase those shares at $5 per share on September 27. We check and see that the shares have been a bit volatile, but are currently trading at $3 per share. We decide to purchase the option, which doesn't mean we have to purchase the shares at that price, only that we have the option to do so, which the seller must honor.
So, several months pass, and on September 27 we check. Taro, Inc. shares are selling for $8 per share! We contact our broker, fulfill the contract, and pay $5000 for the 1000 shares. We then immediately sell the shares on the open market for $8 per share, grossing $8000 dollars and making a $3000 profit. The money was out and back into our savings in less than a day, and we have a nice profit to show for it.
But let's say that day comes, and the shares are only worth $4 per share. We could buy the same stock for cheaper than the contract on the open market, so we let the contract expire and the seller keeps their shares. They made money when we bought the option contract, and they can still find another buyer, or sell the shares themselves, so the risk was very small for them. We're only out $200 for the opportunity, which is less than we usually spend eating out.
I really like this idea, and plan to spend some time learning option trading!
Author Resource:
Stock & Options Training, LLC (http://www.markettamer.com/) the ultimate resource for stock and option training . Art Gib is a freelance writer.Distributed by Content Crooner
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