The options trader
Whereas stock traders aim to make profits through buying stocks and selling them at a higher price, options traders can make profits through buying options contracts and selling them at a higher price. Also, in the same way that stock traders can take a short position on stock that they believe will go down in value, options traders can do the same with options contracts.
In practice however, this form of trading is far more versatile than stock trading. For one thing, the fact that options contracts can be based on wide variety of underlying securities means that there is plenty of scope when it comes to deciding how and where to invest. Traders can use options to speculate on the price movement of individual stocks, indices, foreign currencies, and commodities among other things and this obviously presents far more opportunities for potential profits.
The real versatility, though, is in the various options types that can be traded and the range of different orders that can be placed. When trading stocks you basically have two main ways of making money, through taking either a long position or a short position on a specific stock. If you expected a particular stock to go up in value, then you would take a long position by buying that stock with a view to selling it later at a higher price.
If you expected a particular stock to go down in value, then you would take a short position by short selling that stock with a hope to buying it back later at a lower price. In options trading, there's more choice in the way trades can be executed and many more ways to make money. It should be made clear that options trading is a much more complicated subject than stock trading and the whole concept of what is involved can seem very daunting to beginners.
There is certainly a lot you should learn before you actually get started and invest your money. With that being said, however, most of the fundamentals aren't actually that difficult to comprehend.
Once you have grasped the basics, it becomes much easier to understand exactly what options trading is all about. Buying an options contract is in practice no different to buying stock. You are basically taking a long position on that option, expecting it to go up in value. You can buy options contracts by simply choosing exactly what you wish to buy and how many, and then placing a buy to open order with a broker. This order was named as such because you are opening a position through buying options.
If your options do go up in value, then you can either sell them or exercise your option depending on what suits you best. We provide more information on selling and exercising options later. One of the big advantages of options contracts is that you can buy them in situations when you expect the underlying asset to go up in value and also in situations when you expect the underlying asset to go down.
If you were expecting an underlying asset to go up in value, then you would buy call options, which gives you the right to buy the underlying asset at a fixed price.
If you were expecting an underlying asset to go down in value, then you would buy put options, which gives you the right to sell the underlying asset at a fixed price. This is just one example of the flexibility on these contracts; there are several more. If you have previously opened a short position on options contracts by writing them, then you can also buy those contracts back to close that position.
To close a position by buying contracts you would place a buy to close order with your broker. There are basically two ways in which you can sell options contracts. First, if you have previously bought contracts and wish to realize your profits, or cut your losses, then you would sell them by placing a sell to close order. The order is named as such because you are closing your position by selling options contracts. You would usually use that order if the options you owned had gone up in value and you wanted to take your profits at that point, or if the options you owned had fallen in value and you wanted to exit your position before incurring any other losses.
The other way you can sell options is by opening a short position and short selling them. This is also known as writing options, because the process actually involves you writing new contracts to be sold in the market. When you do this you are taking on the obligation in the contract i. Writing options is done by using the sell to open order, and you would receive a payment at the time of placing such an order.
This is generally riskier than trading through buying and then selling, but there are profits to be made if you know what you are doing. This style is known as swing trading as the idea is basically to identify price swings and buy and sell appropriately to profit from them. You can read more about this style on the following page — Swing Trading.
This is the style that is mostly used for trading options and futures. It's a relatively low risk style, but it does require a very comprehensive understanding of the mechanics of options and options trading.
It's not a style that should be considered by beginners, and it is primarily used by professionals that have the necessary experience and knowledge to be successful. For further information on this specific style, please visit the following page — Position Trading.
Market makers are professionals that are vital to the options exchanges. They ensure that there is always enough depth and liquidity within the market for the traders to be able to execute their desired transactions.
Market makers buy and sell in very high volumes and help traders facilitate transactions if there is no corresponding buyer or seller in the market. This helps to guarantee the market moves efficiently.
Market makers are generally employees of financial institutions. You can find out more about market makers and the role the play on the following page — Market Makers. On this page we look into the different trading styles in a bit more details, covering the following: Section Contents Quick Links. Day Trading This is a full time style that can be used to trade options, or other financial instruments such as stocks.
Swing Trading This is another style that can be used for trading a range of financial instruments in addition to options. Position Trading This is the style that is mostly used for trading options and futures.
Market Makers Market makers are professionals that are vital to the options exchanges.