What's Options Trading?

Wall Street is on the cusp of a new era. Thanks to the democratization of the stock market and the proliferation of online trading platforms, a growing number of Average Joes are taking hold of their financial futures. As a result, Wall Street is seeing an enormous rise in the number of investors curious about the opportunities and mechanics of option trading.

Just like picking up a new instrument, mastery begins with a firm grasp of the basics. For first-time investors who want to make the most of their capital, that means determining what's options trading. It’s a complicated term that can easily sound like gibberish to first-time investors. Fortunately, if you’re wondering how to become an options investor, you’ve come to the right place to take your first steps.

Millions of people who are increasingly curious about investing struggle with the decision of where to start. While some turn their attention to traditional stock investing, options might be a better choice for you depending on your budget and goals.

If you’re considering options trading, you’re not alone. According to the Options Clearing Corporation (OCC), the number of options contracts filed in 2021 rose a staggering 35 percent year-over-year. In fact, the OCC cleared a record-breaking 39 million options contracts every day last year. That means there are thousands of people trying to invest in options.

The precipitous rise in filled options contracts has been largely attributed to the groundswell of support (both cultural and technical) for retail investors. Thousands of people with no formal training are tackling options investing as an alternative investment to stocks in the hope of securing financial freedom for themselves and their loved ones.

Of course, before you can start generating extra income or growing your retirement account, it’s imperative that you have a firm grasp of what’s options trading. Otherwise, you’ll be headed for disaster.

Never Trade Without All the Information

Since the tumult caused by the GameStop uprising in 2021, finding a new pet stock to rally behind every few months has become something of a popular trend. A lot of short-term investors put huge sums of money on these hot-button options without fully understanding the penalties (risks) for misplaced investments.

To some degree, you can jump right into stock investing. That’s not the case with options investing, which requires education, research, and risk management. When you trade in stocks, the worst that happens is that you lose your initial investment. Investors that lack knowledge and options trading strategies easily get in over their head and may lose far more money than they initially invested. The potential for losses with options trading can be astronomical. While popular moments (opportunities) like the GameStop trading rally was profitable for a select few, far more options investors ended up losing thousands more than they intended due to poor risk management.

That’s not to say risk management isn’t possible with options investing. Far from it. Risk management is a key element of a profitable mindset. The point is that options investing can be dangerous if you’re not equipped with a broad body of knowledge and the right strategies to grow your wealth safely. That’s why, before you invest a single cent, you need a thorough understanding of what’s options trading.

A Look at the First Options Trading Contract

To teach the basics of an options trade, perhaps it’s best to start with an example. Let’s take a look at one of history’s first recorded options investments. In Politics (Book One, Part 11) famed philosopher Aristotle relays the story of an acquaintance named Thales.

Thales was an aspiring philosopher in his own right. Unfortunately, he was also a poor person. The thinking in ancient Greece was that if a person wanted to offer thoughts on grand issues of the day, they should be rich. After all, if a philosopher didn’t have the intellect to wrangle up a grand sum of money, how smart could they really be? As a result, Thales found himself with a conundrum. Before the masses would listen to his thoughts, he needed to prove himself by generating some wealth.

One of Thales’ specialties was meteorology. He applied this (at the time) rare knowledge to his current surroundings and discovered that the current weather conditions were right to yield a huge bounty in the coming olive harvest. Once all those olives were plucked from the fields, they would be sent to the nearest presses to be converted into oil.

It was in the presses that Thales saw his opportunity. He set about securing the options to use the local olive presses during the harvest. Because his bid came so early, he was able to secure the use of the presses for a paltry amount. Ostensibly, he owned the production rights to all of those presses. However, Thales still needed farmers to send their crops to his presses.

Once the olive harvest rolled in, Thales was proven correct. There were indeed a whole lot of olives coming in from the fields and the farmers desperately needed to use the presses. Suddenly, Thales was able to set his own prices for the use of his optioned olive presses. He presumably gloated in triumph having demonstrated that any decent philosopher can become rich should they decide to do so.

What is an Options Contract?

So why are we talking about olive harvests in ancient Greece? Because this simple anecdote contains all the basic component parts of an average options contract.

That is, there are five basic parts of a typical options contract:

• Buyer: The person exercising the option to invest their money in an options contract.
• Seller: The person exercising the option to sell their stake in an options contract.
• Premium: The amount of money that changes hands at the time of transaction.
• Expiration date: The final date of viability in the contract.

Let’s look at how these four elements of an options contract worked with Thales:

• Our pal Thales acts as the buyer of the options contract when he solicits the right to use olive presses around his hometown.
• The owners of the presses act as the seller, because they yield control of their presses to the buyer, Thales.
• To secure the rights to those olive presses, Thales (the buyer) pays a premium for the right to use the olive presses.
• As the sellers of the contract, the olive press owners get to pocket the premium right away.
• Finally, since Thales’ hold on the presses is temporary, it comes with a built-in expiration date, just like an options contract.

While options trading is undeniably more complex than the above example, Thales’ story serves as a great place to start when you’re first trying to grasp this concept.

A Look at Indirect Ownership

There is another critical aspect to Thales’ quest for riches: the idea of indirect, or synthetic, ownership. This is one of the most critical points to understand when you’re learning what’s options trading. When you buy an options contract, you’re not taking direct ownership of a stock, just like Thales didn’t take direct ownership of those olive presses.

As the buyer of the options on the olive presses, Thales exerted indirect ownership over the right to use the machines. He didn’t buy them outright, but he did exert some control over their value. Thales had the option to sell his right to use the presses for fees from olive farmers seeking to turn their harvest into highly sought after oil.

That is a fundamental difference between stocks and options. When someone purchases a stock, they take direct control of a portion of a given business. When you purchase an options contract, you’re taking indirect (synthetic) control of that business.

In the Thales story, we see the philosopher is able to secure the operation of the olive presses, but not the ownership. Still, his indirect control of the asset allowed him roughly the same amount of control as direct ownership, with one notable exception. Thales was able to gain leverage over the working of the olive presses with much less of an initial investment than he would have needed had he bought the olive presses outright.

The same is true when you are investing in options. For a comparably lower sum, you get more buying leverage for less money than traditional stock investment.

A Quick Example of Leverage

If you’re sincere about learning how to invest in options, it’s essential to understand the concept of leverage. Let’s apply what we’ve learned so far to a more straightforward example that demonstrates the amount of leverage an options investor gains when purchasing a contract.

Let’s say that a given stock is valued on the market at $50 per share. For a traditional stock investor to gain control of 100 shares of stock, it would cost $5000 (because 100 shares at $50 a share adds up to $5000). Should the price of that stock rise, the stock owner would see a one-to-one return on their investment. That is, if the stock price rose to $51 per share, that stock owner’s investment is now worth $5100.

A stockholder also gets privileges in some companies, like dividends and voting rights. For most investors, however, these perks don’t really amount to much influence over (or profit from) the daily operation of the business.

Purchasing options, meanwhile, works very differently. Depending on the expiration date of a given options contract, an investor will pay anywhere from $1.25 to $25 per share (depending on which strategies you’re employing). Since the purchase of one options contract implies indirect control over 100 shares of stock, options investors will pay 100 times the price per share. So, if an options contract costs $1.25 per share, an options investor will need to invest $125 to purchase one contract. If an options contract costs $25 per share, an investor will require $2500 to gain control.

If the stock rises in price, the options investor will see a rise in the value of their position that’s similar to that of a stock trader. The difference is that the options investor’s initial payout was (at most) half that of the stock investor’s, resulting in a higher qualitative return on investment.

In short, anyone asking, “what’s options trading?” should know that it’s a form of investment that allows people to control more stock with less money for a higher qualitative return on your investment. That’s an opportunity you simply cannot ignore.

Can You Really Make Money With Options?

Now to the real question asked by those people researching investment methods: is it really possible to generate wealth by investing in stock options? The short answer is: yes.

Of course, that “yes” comes with a big caveat. You can make money, but you need to have a thorough understanding of options, the strategies for investing in them wisely, and the techniques necessary for protecting your assets..

• First and foremost, risk management should forever be at the front of your mind.
• As you invest, it’s critical to establish strict personal guidelines that govern your investment.
• Learn to use and harness time-tested stock options investing strategies.
• There are no guarantees in the stock market.

Mastering each of those steps takes diligence and patience. Fortunately, the education course offered at Record Options Investing (ROI) can teach you all four of those steps, from the basic mechanics to the importance of risk management.

However, for people wondering, “what’s options trading?” who intend to be successful, there’s another step beyond a new education. For those considering options investing for beginners, it’s essential to maintain a dedication to actively monitoring your investments. A stock investor has the ability to purchase an amount of stock and sit on it for several years (provided the company doesn’t go out of business). Options investors with financial goals must take an active role. That doesn’t necessarily mean buying and flipping contracts on a short-term basis; it means remaining up-to-date on market fluctuations and the goings-on at the businesses underlying your investments.

When you add continued research with the education you’ll get at ROI, you’ll quickly discover that options investing isn’t nearly as impossible as you might have previously thought.

Learn to Invest, Not Trade

In the world at large, you’ll hear “trading” and investing” used somewhat interchangeably. At Record Option Investing, we prefer to make a crucial distinction between these two words. It’s true that in an options contract, there is an aspect of trading, but from our perspective, there’s a difference between “trading” and “investing”.

Think of it in terms of one of options’ primary elements: time. ROI considers “trading” to be the actual transaction of an options contract. It’s a short-term process that — if undertaken recklessly — can prove your financial undoing.

Options “investing,” meanwhile, is a long-term process intended to manage your risk and generate consistent growth. From time to time, we’ll use the term “ options trading” to refer to the physical transaction of procuring an options contract. That said, ROI considers trading to be one part of the strategy for transforming your hard-earned money into actualized financial goals. Traders want to get rich quick. Investors have an eye on the future.

When you work with Record Option Investing, you’ll discover that pressing the “TRADE” button comes at the end of a multi-step process that begins with learning the basics before transitioning into a routine of daily research, and culminating with a tutorial of risk-controlled strategies that can grow your wealth.

Completing an options trade is just a small part of that larger picture.

How Difficult Is It to Learn Stock Options Trading?

There’s a lot of nuance to the world of options investing. That’s undeniable. The old guard of Wall Street takes pride in the market being opaque to outsiders. As a result, options trading for beginners can quickly become overwhelming to those investors who attempt to learn the ropes alone.

The democratization of Wall Street may carry with it the tide of opportunity, but those people who want to ride the wave all the way to the shoreline of retirement will need to bring their own boogie board. One CEO put it bluntly when he spoke to CNBC: “The question of democratization shouldn’t be ‘can I trade options?’ but ‘can I have straightforward access to the options strategies that Wall Street uses?’ The playing field is not level right now and no one is really focusing on that.”

In other words, learning to successfully invest in options is an extremely challenging prospect without the right education, tools, and guidance. That’s the reason Record Option Investing exists. Our goal is to instill in retail investors the knowledge and resourcefulness required to build a thriving financial portfolio.

When you sign up for the 14-Day Option Investor course, you’ll learn the in’s and out’s of options investing along with time-tested strategies designed to improve your overall financial well-being.

So, what are options? They’re a form of investment that could prove a fantastic way to provide security and safety to investors willing to commit themselves to learning the mechanics and strategies for options investment. Learn more about the power of options investing here.