How Options Trading Works in the Stock Market

Options trading does not actually require the purchase of stock. You will only trade contracts (as opposed to the actual stock) that represent the stock.

Here is given example for “how it works” in simple terms:

✅ 1. Buying Options

You can buy options contracts through your brokerage account. Typically, each contract will represent 100 shares of the underlying stock.

✅ 2. Paying the Premium

When you buy an option, you pay what is known as the premium. The premium is the price of the option that provides the maximum risk for you as the buyer of the option. If the trade does not go your way, you will only lose the premium you paid.

✅ 3. What is the Strike Price?

The strike price is the assigned price that you will be able to buy (with a call) or sell (with a put) the asset at. Your hope is: 

• For a call option: Price of stock rises above strike price.

• For a put option: Price of stock falls below strike price.

✅ 4. Keeping an Eye on the Expiration Date

Options have a time frame, they have an expiration date. You have to make a decision if you want to exercise, sell or let the option expire before that date. If your option is “in the money,” you have the ability to exercise or sell for a profit.

✅ 5. Exercising the Option

• If your call option hits the profit zone (stock price > the strike price), you will be able to buy the stock at the price below the market price. 

• If your put option is closing profitably (stock price < strike price), you would sell the stock at the higher strike price.

In most cases, traders are going to sell the option prior to the expiration and cash out rather than exercise the option. 

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Final Thoughts

Options trading is not just a hub for experienced professionals. With the right guidance we can all become experienced, This means we Moneyplantfx want to educate you and empower you.