For investors who want to diversify their portfolio holdings and generate enhanced income, trading options is a viable way to do that.
Below you will find three simple lessons about how to trade options and how to try to earn some serious profit. However, options trading comes with risks and investors should be prepared to withstand losses from this high-risk, high-reward strategy.
1: What is an Option?
Options are securities, just like stocks and bonds, that are traded between separate parties with the goal of generating a profit. But beware of potential losses.
An option is a contract that is sold by an individual, who is known as the option writer. The option writer receives a premium for selling the security to another investor who is called the buyer, or the option holder. The option buyer has the right, but not the obligation, to buy or sell an underlying security, which could be a stock, bond, index, interest rate, currency or commodity, at a specified price within a certain time period.
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