Options Trading Tutorial

How do stock options work?

I'd like to know more about how they work and how to buy them. My stock trading web site wouldn't authorize the purchase. Do I need a premium account? miss attractive, that site you recommended is *spam* and offers no tips on stock trading whatsoever. thanks for not being helpful.

Public Comments

1. Options usuall come from negociations. You go to work for Microsoft and they give you the option to buy 100,000 shares of stock at the price the day you come in at a future date, in like 2 years. You come in at $100 a share and in 2 years it's $200 a share. You make $200,000 by investing $100,000 in 1 second. Now if it's $85 a share in two years, then you screwed up and cost the company money. You lose. It's like future, except you don't act on it or invest UNTIL the future date. With futures YOU have to buy because you committed.
2. Stock options are typically given to an employee by the employer. Stock options give you the right to buy a specific number of shares at a price that the employer sets. This is called the strike price. So, for example, if your employer offers you 100 shares of stock options at $20, you can exercise the option and pay $2000 for the 100 shares. Remember, in this example, the $20 is the discounted price. The stock could be regularly trading at a higher price. Companies usually offer stock options as an incentive other than salary. It also gives the employee a sense of ownership in the company. For some companies, doing this has made millionaires out of some employees. A good example would be Google.
3. Don't confuse traded options with the options given to employees, they are entirely different. Here's a website with a brief description: http://www.superiorinvestor.net/trading-options/stock-options-explained.html Basically, you are paying a small amount of money for the ability to purchase stock at a set price at a set time in the future. With calls (expecting a price increase), if the stock price goes above your (strike) price, you make the difference between your price and what the stock is at on the expiration date, minus the amount you paid to buy the option. Puts are just the opposite, with you exepecting a price decrease. Keep in mind that these contracts can be traded and the value fluctuates based on the daily stock price. There is also a time premium, as the value of an option decreases as it approaches it's expiration. If the time expires and does not reach your strike price, you're out the amount that you paid for the contract. You may need a premium account (you'd have to ask the brokerage you're with what their requirments are - they vary), as well as possibly needing a minimum balance to back up the trades. I would also warn that these can be pretty volatile and are usually part of a mor complex trading strategy, so you ought to some homework before you try it out (there are plenty of good primer books). Good Luck!