Trade Options Like a Pro With This Stock Market Investing Guide Part 1

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In this stock market investing guide I am going to teach you everything you need to know about options.
Options are an extremely versatile security they enable you to adjust your position according to any situation that arises.
While options have many good points they can also be extremely risky.
In this article I am going to teach you the fundamentals of options, bear in mind that most traders have years of experience so don't expect to be an expert after reading this stock market investing guide.
What are options? An option is a contract that gives the buyer the right, but not the obligation to buy or sell an underlying asset at a specific price on or before a certain date.
Options are securities just like stocks and bonds, they are also bonding contracts with strictly defined terms and properties.
Here is an easier explanation if you don't understand.
Say there is a house you'd like to purchase.
Unfortunately you won't have the money to buy it for another two months.
You talk to the owner and he gives you a deal that gives you the option to buy the house in two months for $100 000.
The owner agrees but for this option you pay $3000.
Now there are two situations that could arise.
The market value of the house could skyrocket to $1 million for whatever reason.
Because the owner sold you the option he is obliged to sell you the house for $100 000 this gives you a profit of $897 000 2.
The house floods causing it to become worthless.
Because you bought an option you are under no obligation to go through with the sale.
You loose nothing except for the $300 you spent on the option.
These examples demonstrate two important points.
Firstly when you buy an option you have a right but not an obligation to do something.
Secondly an option is merely a contract that deals with an underlying asset.
For this reason options are called derivatives, this means the option derives its value from something else.
In our example the asset was the house; usually the asset is a stock or index.
In the next part of this stock market investing guide I am going to teach you about the two kinds of options which are calls and puts.
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