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Option trading are generally defined as a contract between two parties in which one party has the right but not the obligation to buy or sell a specified amount of an underlying security at a specified price within a specified time. The great leverage through option trading attracts more and more speculators.

Investors can use option trading to help protect a portfolio of stocks against sudden downward pressure. This is a very conservative strategy where puts are bought to act as a hedge. Investors thereby buy the right to sell stock already owned at a particular price regardless of what the market is doing. If the price of the underlying stock continues to rise instead of falling, this strategy will limit the portfolio's upside potential reducing it by the cost associated with the purchase of the puts.

Another very conservative option strategy is to sell calls while you own the underlying stock. This is what is known as covered call writing; it's a strategy usually used by investors to stimulate more income on stocks that are in their portfolio already. This strategy gives unlimited downside protection just in case the stock prices drop.

If stocks don't take too severe a nosedive, a covered call writer can lessen the impact of a decrease via receipt of the call sale premium. On the other hand, should stocks plunge precipitously, a person who invests will still suffer a loss, since the amount of the premium will not be as great as the amount lost by the underlying securities.

Investors with a very high level of risk tolerance might want to leverage relatively modest amounts of money. Buying options is connected with rights, not obligations. Traders might buy calls expecting to be able to sell them later for profit - if the price of underlying security rises. Speculators purchasing call options or selling put options will hope they can profit from the rising prices.

Traders may also buy puts in the anticipation of selling them later at a profit- if the underlying security drops in price. Speculators buying put options or selling call options hope to profit from declining prices. Because speculators may not own the underlying equity, they risk losing substantial amounts. If a long option expires worthless, the options buyer cannot lose more than the amount paid for those options plus commissions.

Conversely, speculators who disposed of options could forfeit much more than the premium they earned for liquidating them. If you find all the terminology confusing regarding option trading, do a little research with the help of the Options Dictionary as a part of your stock option education.

Option trading are generally defined as a contract between two parties in which one party has the right but not the obligation to buy or sell a specified amount of an underlying security at a specified price within a specified time. The great leverage through options attracts more and more speculators. A very conservative option strategy is to sell calls while you own the underlying stock. If you find all the terminology confusing regarding options trading, do a little research with the help of the Options Dictionary as a part of your stock option education.