Before a trader tries to design any strategy for trading options, it’s very essential for him/her to understand the fundamentals or basics of options trading. In this article we will try to learn the options trading basics by looking at some of the frequently asked questions. Below are some of the FAQ’s on Options Trading Basics:

What is the difference between Stocks and Stock Options?
Usually traders would have traded stocks before so the first question that arises in their mind is to find the difference between the stocks and stock options. Options are derivatives or extensions of stocks, commodities, currencies or index. Derivatives instruments are valued based on the performance of the underlying asset. With stock options traders are not actually buying the stocks but they are buying a right to either buy or sell a particular quantity of stocks at a certain price before the expiration date. Whereas buying or selling stock means buying and selling the ownership of a security. Amount of investments required with options is not more than 10% of the investments required with stocks, so traders can leverage upon the investments that are not being utilized.

What are the types of option?
There are two types of options:
Call option – Owner of Call option gets a right to buy an underlying asset at a pre defined price before the contract end date.
Put option – Owner of Put option gets a right to sell an underlying asset at a predefined price before the contract end date.

What are the risks of options trading?
One of the most risky aspects of option trading is the fact that the option contract may expire worthless and the buyer of contract may end up losing his premium money if his/her judgment on the price of underlying asset goes wrong.

Why options are being used?
Options have a potential with the help of which a trader can make a fortune if he/she employs correct strategy, so options are being used to gain profits.  However, options are also being used by hedge fund managers, institutional investors or individual investors to hedge against the risk their portfolio might have.

What are the requirements for trading options?
A trader may need brokerage account, trading account and enough money in his/her trading account for him/her to be able to trade options. Trader can trade online using software, through a website or by calling his brokerage firm and placing a trade.

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