Options Trading System -- Stock Puts -- Stock Calls

The options trading system is based on an underlying security or a ‘contract’ which entitles a holder to the right to buy or sell shares, but carries no obligation of doing so. The trading system incorporates options on stocks, that is, the trader need not buy or sell the actual stock, but is concerned only with the options on stocks.

So far we have figured that out, so what happens if I do decide to actually engage in options trading? Traders have to agree on a price on or before a certain date of the stock that they are considering as their option, with a counterparty who offers the contract.

Once you do this, you need to concern yourself with the type of option that you can buy, which are the Stock Calls and Stock Puts. Call options offer the rights to buy shares in the said stock, and put options offer the rights to sell shares in the stock in question. The other important aspect to keep in mind is whether the underlying stock option goes up or down in value.

Trading your options depends on the above criterion, that is, when the stock price reaches a favorable price, selling it off will be a prudent choice. However, Call options rise in value when the said stock shares rises up, Put options also increase in value when the stock goes down.

This is not paradoxical in fact, because a trader will actually buy Call options on an underlying stock when the value is predicted to go up, or buy Put options on the same when the value is predicted to rise. It is a matter of selecting the options, in terms of the type of Call or Put.

When the predicted value of the stock moves in a desired direction, that is, Up for Call options or Down for Put options, we can make the profitable transactions. At the core of options trading system is a really attractive proposition: traders can make money whether the said stock moves up or down.

Added to this is the attractive feature of the price: options cost only a fraction of the actual stock, and a small movement in the price of the said stock, creates a much bigger move in the value of the option by 10 times, or even 100 times the actual price.

By trading options you can make far more profits than selling the actual stock, by risking a relatively smaller amount of capital in the entire process. This sounds too good to be true.