Options trading may look very complex to the new comer and it does require a good amount of knowledge to really get rewards from it. However, once you have an understanding of it; you can make a lot of money. There are many types of options, with the main one being Exchange traded options. These are options such as stock options, commodity options, index options or options on future contracts. Many traders favor stock options as the rewards are high. If they predict correctly, they can make a profit regardless of whether the stock price goes up or down.
In order to understand how options work, let us look at the following example: You have decided that you want to buy some gold. You go to a gold dealer and see the price at $450 per ounce. Because it is the last week of the month, you are still waiting for your salary to go in your account, so you cannot buy it yet. You make an agreement with the dealer where he will give you the chance to buy it at the same price by next week. He requires a fee for doing this, so you pay him $50. You are now the option holder and have the right to buy the necklace, but you are not obligated to buy it in the agreed time..
The next few days you see an announcement that the country is in a recession, markets crash and investors start buying gold driving its price up to $900 per ounce. With you salary just in, you rush to the gold dealer who is obligated to sell you gold at the price agreed on. You have just made a profit of $400 should you decide to sell the gold at its current market value. If however there was no crisis and the price of gold had dropped to say $300 you would not be obligated to buy it at $450 and you would lose only $50..
Option trading is extremely lucrative and there are many complex contracts that are made. Before you consider getting involved in options, you need to make sure you learn the basics of the trade. You should also make sure that you have capital specifically set aside for options trading. In the beginning, only trade with small amounts until such time that you have enough experience to place more per trade..