By Online Trading Academy
Options trading allows traders to control a stock for a fraction of its per-share price without ever owning it. The leverage and volatility of options trading can create dramatic results with small amounts of capital. Learning the ins and outs of options trading strategies and how to trade options gives you a powerful tool for making profits no matter what is happening in the overall market.
What is a call? What is a put? An option is a contract to buy (=call) or sell (=put) an agreed-upon quantity of a specific stock or other asset at a specific price, up until a specific expiration date. As a stock options trader you can write options on stocks you own, but you can also buy and sell options in the open market with no need to own the underlying stock.
Because the value of options is tied to price movement over a given period of time, options are far more volatile than stocks and price changes are dramatic; a $100 stock that goes to $110 has seen a 10% increase, but this might translate to a 100% increase in an option that allows you to buy at $100 anytime in the next six months. It’s not unreasonable that traders ask themselves, “Why should I spend $100 to buy a stock when I can control it with a $5 or $10 option?”