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What Are Stock Options?

Stock options are contracts that give investors the right (but not obligation) to buy or sell a stock at a certain price, before a certain date. Simply put, it’s a method of trading stocks on leverage. For example, when you buy a call option, you buy the contract that will allow you to buy 100 shares of a stock at a fixed price (called the strike price).

How do Stock Options Work?

If you believe a stock price will go up, you can buy call options to gain from the upside, by investing a fraction of the cost of the stock (100 shares per contract). Call options are a way to leverage your ‘long’ bets. If you believe the stock price will go down, you can buy a put option to gain from the downside, by investing a fraction of the cost of the stock (100 shares per contract).

How are Stock Options Taxed?

There are two ways taxes are considered when trading options – one for individual stock options, and one for options on index funds (such as the S&P500 index fund). Gains in trading individual stock options are treated as ordinary income and taxed using the ‘short-term tax rate’.

Where to Learn Stock Options Trading?

Let’s discuss where to learn options trading and how long it takes for an average person to learn options trading. In the industry, the average amount of time required for a newbie investor to reach the junior trader level of options trading is 6 months to two years. Everyone has their own speed, but one must make sure to fully understand the risks of options trading before even putting a cent into options trading.

Why have an Options Trading Strategy?

Generally, for most investors, you can’t make money with stocks when the market goes down or trade sideways. That is where options come in. Options allow you to make money in any market condition – whether the market goes up, down, or sideways. You can make money in any situation in options by leveraging different strategies. Options trading offers many advantages if you learn the tricks of the trade.