Stock Trading Options - How Stock Options Work

How do you begin
stock trading options?

There are some significant benefits to stock trading options. First, you are able to control a large amount of stock with a small amount of money. This

provides a great deal of leverage, and as you know, when you have a large amount of leverage, you can either make, (or lose) a lot of money very quickly. So the goal is to first understand how it all works, then practice with a simulation. Then, when your pretend money begins to grow consistenly, invest with real money. When you combine high leverage with consistent profitability, you can become rich. Let’s look at some options examples.

It’s February 25th. We’ve done our homework and have a short list of companies that we like. One of them is Blockstone International. At $30.00 per share it seems undervalued and a good pick for stock trading options. The option is priced at the $2.00 for a block of 100 shares, which will expire on March 30.

Call Quote | BNE is the fictitious symbol of Blockstone Intl.
1.75-2.00 | March30 | $2.00 is the premium price.

So what is it going to cost us to purchase this contract? Because this contract involves 100 shares, we need to multiply the premium price of $2.00 x 100 = $200.

$30 per share x 100 shares of BNE stock = $3,000. For only $200 we just gained access to $3,000 worth of stock. That’s leveraging!

Let's explore our stock trading options

Now that we have the options, what do we do with them? We have the right, without the obligation to buy the stock. If we excercise the stock options, we own the shares and can either keep them, or sell them on the stock market. If we don’t, we’ll lose only the $200 we originally invested.

March 10th: The BNE stock is at $32.00, which is its breakeven price. ($3200 – $3000 – $200 purchase price = $0.00) You could exercise your option now and then choose to either sell the stock and break even or keep it and hope it would raise in price. Let’s keep the options and see what happens.

March 16th: The stock price has risen to $36.00. It has exceeded the breakeven price by $4.00 ($36.00 – $32.00 = $4.00). This means your stock options contract has made a profit of $400.00 (100 shares x $4.00 = $400). But, let’s wait to see if it goes higher.

March 19th - The expiration date: The stock price has fallen quickly to $29.00! Because the stock price is below the original stock options contract value of $30.00 per share, the stock options contract is worthless. The initial premium purchase amount of $200.00 is lost.

Stock trading options is an exciting and potentially very lucrative investment method. As we’ve seen here though, it’s very easy to get greedy and wait too long. A good rule to follow is to always set your entry and exit prices when purchasing stock options according to your plan, and then and stick to them.

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How do you beginstock trading options?

Let's explore our stock trading options

How do you begin
stock trading options?