Trading stock options is another speculative form of investing. Options are derivative’s that allow you to invest in the possible movements of the investment being invested in. With stock option investing, you can buy or sell options based on your theory of what the stock will do. With options, you can act on your stock picks without actually having to buy the stock you are looking at.
One thing to remember is if you decide to buy an option, you have no obligation to do anything. You are merely buying a right to create an action, but you do not need to act on that right if the conditions are not right. If you choose to sell an option, you are contractually obligated to perform some sort of action. This is important to remember when determining your activity in the option market.
Information on what options are trading for can be found at NASDAQ/investing/options. There is information here for both calls and puts that will let you know what the options are currently trading for.
Calls are the right to buy a stock at a particular price. If a stock is currently trading at $47.00, you can pay a premium to purchase the stock at $50.00 at some future date. These trading dates are set for some time in the future, usually one month, two months, six months, etc. The expiration date always comes on the third week of the month. In the example above, if the price of the stock did not go above $50.00 by the expiration of the option, you would probably choose to let the option expire with no action on your part.
Puts are the right to sell a stock at a particular price. For example, if a stock is trading at $47.00, you may buy a put at $45.00. This then gives you the right to sell the stock for $45.00. This action can be taken at anytime up to the expiration date. If the stock were to fall to $40.00, then you would act on the option and sell the stock for $45.00 and also buy the stock for the $40.00 price.
With option trading, you do not necessarily need to buy or sell the actual stock. You also have the right to trade the options with other traders at whatever price the option is currently trading for.