Exercising the Option to Buy or Sell

What Options Can Do

Options trading on the stock market is an additional way to diversify your investment portfolio. This differs from trading options and futures on commodities.

Stock market options trading involves contracts which give an owner the opportunity to buy or sell a security at a fixed price either before, or on, the date the contract becomes due. Investors can either trade the security itself, or trade the option. Some investors choose to use options trading as a hedge against losses in other segments of their portfolios.

Let’s take a look at exercising the option to buy or sell a particular stock for which you have a contract. You have any time up until the contract’s expiration date to decide what you want to do. You can either take the stock or sell them at the price fixed on the contract no matter what their current value on the market might be.

Consider this example in options trading. There is a stock you have had your eye on and because of your research and analysis of historical trending reports, you believe the price of these stocks will rise. Should you be concerned that the price may not rise as you expected, you would probably wish to buy a call option that is close to the price on the current market.

Before that option expires, the stock price may increase quite a bit. In that instance, you would exercise the option to buy at the lower contract price.

Conversely a put option gives you the right to sell at a fixed price. You would buy a put option if your research indicated the stock price would likely fall.

Now your options trading choice is whether to keep the stock and its built-in gains, or sell it and take your profit. Of course, there will be fees due out of this profit which pay for the cost of the option itself, taxes, and brokerage commission.

Options trading is not as straightforward as you might believe. The beginning investor would do best to use a good deal of caution and the benefit of a mentor’s experience before attempting to profit from options trading. Mentors can help save you all the pain of making unnecessary losses, so I suggest you find one, and grab a book to learn from.