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What is Online Options Trading?

Article Details
  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 20 September 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Online options trading is a modern kind of investment that uses the Internet to facilitate specific trades that effectively bet on an up or down movement for stocks or financial products. Individual traders can trade options on the Internet, as long as they have a working online brokerage account with “options capability.” Lots of investors are looking at these kinds of accounts to get some big potential gains with less risk.

Trading options can be less risky, in some ways, then trading the underlying stocks. One reason is because although stocks are bought at full share price, an option can be a lot less expensive, allowing the trader’s “bet” to be placed at a lower cost. The way this works is through options contracts, which are essentially agreements for “borrowing” shares, and repaying them at a future date.

When a trader buys options, he or she is entering into a complex financial agreement. Two types of options provide opposite incentives. A “call option” is a bet that a stock price will go higher. A “put option” is a bet that a stock price will go lower. In either case, the money that an investor pays for an option facilitates the complicated buy-back contract that will allow him or her to make money if their predicted stock activity happens.

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The detailed explanation of an option can make a beginner’s head spin. One way to explain this is that for a nominal fee, say 25 cents a share, the investor can purchase an option that will pay off according to how much the stock rises or falls over a given time. If the stock rises more than the cost of the option, for example, a share price rise of $1.00, the remaining 75 cents per share is the gain of the investor.

Looking closely at options, some investors see how lucrative these contracts can be. In addition, some financial institutions offer more specific options that can be hedged to limit risk. All of this adds up to a lot of popularity for online options trading tools and services.

Another way to find out more about online options trading is to open an online brokerage account with options capability. Many of the big online brokerage companies advertised on television offer options trading. When the investor opens up this account, he or she will be able to see the specific list's prices for options that “mature” on different dates, where the price of an option depends on the time allowed for price rising or falling, and how much change in cost the trader is predicting with his or her option purchase. The detailed price lists available from online options trading software are things that investors use to have to pick up the phone to get, but these days, the innovative software programs built for online brokerage accounts let online traders effectively become “options buyers” for a chance at some pretty big gains, but not without some risk of loss.

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