Why Options Trading Works and Has the High Payouts

By: Luke Anderson
You may wonder, what is this buzz I keep hearing about options? Options are contracts giving the purchaser the right to buy or sell a security (stocks) at a set price for a set amount of time. Options come in many types, and the business of options trading is generally high risk. The buzz is created by the people who have the knowledge of when to buy, and more importantly, when to sell.

Naturally, because trading options is high risk, the payout is extremely high. It is not uncommon for some gains to exceed 1000%. However, most gains are in the 100%-150% range. Calculated over a standard period of one year, large amounts of investment can grow phenomenally large.

Options by nature are a losing proposition. 95% of the time, the odds are stacked against you. However, it's that 5% that yields the high payout. Given viable information, reaching into that 5% of success is fairly easy. There are many firms and organizations that have proven methods of tapping into that success rate.

How many stocks should you trade? A part of the secret success is monitoring patterns. There are many stocks that follow such a pattern, and once you recognize this, your first step is done. Generally, a small amount of stocks are needed following the trends above in order for you to find success.

What if I can't watch the market daily? Some people get tied up with other things, family, work, Warhammer Online, etc, and can't keep an eye on the market. Options do allow investors to be passive in their buying and selling. Risk tolerance factors can be built in, which tend to not allow huge gains, but modest gains continually over time. 25% per month over time adds up.

The most common way to trade stock options is trading standardized options contracts that are listed by various futures and options exchanges - there are currently six exchanges in the United States that list standardized options contracts based on underlying stocks - The Philadelphia Stock Exchange (PHLX), American Stock Exchange (AMEX) and NYSE Arca in New York City, and the Chicago Board Options Exchange (CBOE) which are all open-outcry marketplaces, and the International Securities Exchange (ISE) and Boston Options Exchange (BOX) are electronic marketplaces. However, even for the non-electronic exchanges, competition and the introduction of automated execution (AutoEx) has led, by late 2006, to hybridization where all but the largest trades are executed electronically. In Europe the main exchanges where stock options are traded are Euronext.liffe and Eurex.

There are also over-the-counter options contracts that are traded not on exchanges, but between two independent parties. At least one of those parties is usually a large financial institution with a balance sheet big enough to underwrite such a contract.

As you can see, the world of options is fairly complex, and risky. However, if you have access to the right information and know-how, trading options can be very lucrative over a short period of time. Teaming with a firm that specializes in the technicalities of investment and trading options is a great place to start. Often, they will have time proven methods to spot trends, and offer great buying/selling advice.



About The Author:
Look at Options Trading for a good source of information about options trading and how options trading works.