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Understanding Option Trade in Stocks

Options Trading

Option trading is a type of investing where individuals buy or sell contracts for stocks before the expiration date. This kind of trading is different from traditional buying and selling of stocks as investors receive the right to purchase or sell the underlying asset at a fixed price, but are not obligated to do so. Option trading is popular because it can help to make large amounts of profit with small amounts of money, and because numerous strategies exist to make money regardless of market direction.

Option trades are conducted on an options exchange where investors can buy or sell contracts. These hold different values depending on the type, such as whether they give investors the right to purchase or to sell, as well as the date they expire. Prior to making a trade, investors must understand the nuances of the option they are buying.

Option trading involves buying or selling a contract for the purchase of stocks at a specific price. This contract will have an expiration date, at which time the stock must be bought or sold. Investors who buy or sell a contract, have the right, not the obligation, to purchase or sell the underlying asset for a predetermined price before or at the expiration date.

Option trades can have a variety of strategies depending on the investor's risk preference. One strategy is known as being "long" wherein the investor buys contracts, and then hopes the underlying stock's price will go up. While the investor has the right to sell the option at any time, they will often wait until the underlying stock reaches a predetermined price, allowing the investor to lock in a predetermined gain.

Conversely, another strategy is to be "short" wherein the investor looks to sell first and then buy at a later date, hoping the price of the option will go down. The investor would then use the money made from the initial sell of the contract to purchase the contract after the decrease in price has taken place.

There are other strategies as well when it comes to option trading. Risk profiles as well as other factors play a large role in choosing which option trade fits best. Before engaging in any type of trading, it is important to understand the different kinds of options, and to be well aware of any risks involved. As with any investment, it is important to do the research beforehand in order to make an informed decision.

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