An option is simply a contract that says that within a certain time frame; you will have the choice of buying into an investment at a fixed price - the price being fixed in the contract. There are two ways in which the buyer takes a risk in options trading. First of all, there is a price to pay for the contract.



For the advantage of having a fixed price for the stock you may want later, you have to pay a price. Of course, your contract is an option, you do not have to buy that stock at the fixed price, but if you do not, you will lose the money that you put down.

The other risk that you as the buyer takes in options trading have to do with the price of the stock you have an option on. If you take out an option on stock at a certain price, and the price goes up, you have gained a lot; because you are buying it for less than you can sell it for.

You can make a profit. But if the price goes down, you can either buy it for the contract price and end up paying a lot more for it than it is worth, or you can decide not to take the option, and lose the money you put down on it.

There are two sides to any options contract - the buyer and the seller. If you are the buyer, you do not have to buy the stock you have an option on - that is why they call it an option. If it seems like a good idea to buy when the expiration date nears, you can. The seller, however, has no choice; the seller has to sell if the buyer wants to buy.

The seller has taken the money that the buyer put down on the contract in order to ensure the price, and now the seller has to sell, even if it turns out that he or she could have sold it to someone else for a higher price.

Another use of options occurs when employees of a company are offered employee stock options. This means that the employee has the right, but not the obligation, to buy shares of the company stock. Options can be short term, for example, three months, or long term, a year, or several years. Many people find this kind of option trading an excellent way to track a stock over the course of long term trends, and then to buy it and sell it when it seems to be at the height of one of those trends.

In my opinion options trading is not for beginners, but an experienced broker can help you make the most of this choice.