A Beginners Guide to Options Trading

Option trading

Options trading is becoming increasingly popular among investors. It’s no longer just the professional traders who are involved as more and more home traders and casual investors are taking advantage of the benefits of trading options. 

What Does Options Trading Involve?

Options trading involves buying and selling options contracts on public exchanges. It works like stock trading. Whereas stock traders make money by buying a stock and selling it at a higher price, options traders earn a profit by buying an option and selling it at a higher price. However, options trading is much more flexible compared to stock trading. Options contracts can be based on a wide range of underlying securities such as indices, stocks, foreign currencies, commodities, among other things, giving you far more opportunities for potential profits. 

Buying Options 

Buying an options contract is no different from buying a stock. You’re basically taking a long position on that option, believing that its value will increase. You can buy an options contract by simply choosing exactly what you want to buy and how many, and then submit your order to your broker. If your options increase in value, then you can either exercise your option or sell them. 

The good thing about options contracts is that you can buy them in situations when you expect the value of an underlying security to increase, and also in situations when you expect the value of the underlying security to decrease. If you expect the value of an underlying security to go up, then you would buy call options, which allows you to buy the underlying asset at a fixed price. If you expect the value to go down, then you would buy put options, which allows you to sell the underlying asset at a fixed price.

Selling and Writing Options

You can sell options contracts either by placing a sell to close order or by placing a sell to open order (writing options). You would usually use the sell to close order if the value of your options has increased and you want to take your profits at that point, or if the value of your options has decreased and you want to exit your position before you incur any other losses. You would usually place a sell to open order if you think the value of relevant underlying security wouldn’t change in such a way that the holder would be able to exercise his or her option to earn a profit. 

Options Spreads

The ability to create options spreads is what really makes trading options an interesting way to invest. While you can make money trading through buying an option and selling it if you earn a profit, it’s the spreads that provide you much more opportunities to make serious money. An option spread is created when you simultaneously buy and sell options of the same class on the same underlying security but with different expiration dates or strike prices. 

If you want to trade options, you will have to work with a brokerage firm that supports options. Keep in mind, however, that each platform is unique and has its own benefits and drawbacks. Thus, it’s best to clearly define what you want in an options account and platform before you get started.

Why is it Difficult to Manage Your Finances Well as a Start-Up?

money

Have you ever heard anyone say that they want to wake up every single day and stare at their dwindling bank balance? Especially a business owner or start-up founder? No one ever has and no one ever will. Especially if you are hell-bent on living a financially cushioned life (who isn’t?) and leading your business into profit.

It can take a lot of discipline to keep track of the finances and make smart decisions all the time. Especially, when you know that your expenses are getting out of control and you don’t have the funds to back it up – this is a common problem with start-ups.

Most start-ups face this issue of managing their finances. Someone who is new to the entrepreneurial world and doesn’t have much knowledge of money is more likely to be broke or go through a major financial crisis than someone who knows the ins and outs of managing the cash flow. Being educated and informed about personal finances is key to keeping the asset column healthy without compromising with the success or becoming mentally frustrated.

Mental agility, determination, and financial know-how helps start-up owners keep their asset column healthy. It is never a great idea to spend your hard-earned money on things that are not going to serve you in the long term – this has to be applied when starting a business as well.

Many startup founders take unwise decisions because they read about what one of their ideals do or how they live or something they are interested in. Earlier, resources were limited and there was no internet connectivity in most parts of the world, so only a fortunate few got a glimpse in the lives of millionaires. 

But now, you have all the resources and information that is required to become a millionaire; and also to follow a millionaire’s lifestyle. This can be used as motivation but most people are blinded by the shine of the diamond and forget all the hardships that made the diamond shine.

Most millionaires buy houses and expensive cars but they don’t break their savings to do so – you might want to follow their lifestyle but you also need to take the incoming cashflow into account if you are trying to impersonate the outgoing dough under the guise of a successful person’s lifestyle. They have money coming in from various investments that take care of their need to live a luxurious life and start-up owners often don’t, so, if you try to walk in their shoes, you can’t pick and choose according to your convenience.

“Our incomes are like our shoes; if too small, they gall and pinch us; but if too large, they cause us to stumble and to trip.” -John Locke

Of course, money won’t come pouring in just by knowing how to manage your finances, you will have to face the adversities and challenges that you are likely to face on the road to success. But by impersonating and walking in the footsteps of successful people, you can set up a good platform for yourself, only if you take into account the bad as well as the good.

Final Thoughts

Yes, it is difficult to manage your finances and make smart decisions all the time as a start-up. You are bound to make mistakes but those mistakes should teach you a valuable lesson. If you don’t learn anything then the difficulty can turn into impossibility real quick. Keep learning from the people who have made it but let the shine of their own car and assets blind you.