Purchasing Stock Options
While most investors understand the basics of buying stock, purchasing stock options can seem a bit more confusing. Stock options are a type of derivative investment that gains value from the underlying value of the stock itself. While some receive stock options as an incentive for working for a company, you can also buy and sell them in the market.
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Stock Option Basics
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A stock option is a type of contract that you enter into with another trader. With this type of contract, you buy the right to purchase or sell a fixed number of stock shares by some point in the future. If you decide to exercise the option, the trader allows you to buy or sell the shares at a specific price that is agreed upon at the time of creation of the option contract. To get this type of contract, you have to pay the other trader a premium.
How to Buy
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When you decide you want to purchase option contracts, you can typically do so through a brokerage account. The process works in much the same way as trading stock. In fact, when you have a standard brokerage account in which you trade stocks, you can typically also trade options in the same account. You simply find the option contract that you want and then purchase it through your online trading platform. The option contract is added to your account and the premium money is taken out of your available balance.
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Options Available
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A few different types of option contracts may be available when you go to purchase them through your brokerage account. A call option is one type of option contract that you could purchase. With this type of contract, you secure the right to buy a specific number of shares of stock. By contrast, the put option is the same idea except that it allows you to sell a number of shares of the stock in the future.
Why Purchase Options?
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While you can purchase stock and realize a profit directly from the movement of the stock price, options give you a little more flexibility in the financial markets. By purchasing an option contract, you do not have to invest as much money as you would to buy the stock, but you can still speculate on the price. For example, if the price of the stock goes up significantly, you can exercise your option at a lower price and then turn around and sell the stock at an immediate profit.
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