STOCKS OPTION TRADING 101:

By Erwin Bogs Rempola, author of the book "DISCOVERING TRUE WEALTH."

Aside from the normal way of trading common stocks by buying or selling at a current market price from the stock exchanges, there are other ways you and I small individual investors can acquire or sell stocks. One way is through option trading or option contract. Although this type of trading is very risky, by contrary, option can significantly limit the loss of investment if you know how to use it and the return can be very impressive. However, you need to understand the ins and outs of option trading before you use this type of investing. I don't recommend you to use option trading if you are not knowledgeable with this type of investing because you could lose your hard earned money very fast if you don't know how to use it. Before you can use option trading, you have to have an ample amount of knowledge about it. You have to understand what option is and how it is done. You have to sophisticate yourself with option terminologies since option has its own unique terms and words it uses in its way of proceeding. Never use option trading if you don't understand how it's done.

Option contract is a right, not an obligation, to buy or sell a security at a predetermined price and under predetermined conditions. The sale of a security has to occur at a specified later date and at a specified price. Not an obligation means that you don't have to fulfill the transaction if you don't want to. The disadvantage of option trading is that it has an expiration date. After the expiration date, you lose the right and the premium you pay for the right. However, the advantage is that option trading allows small individual investors such as you and me to control large block of stocks on a relatively small amount of money. This is why option is a leverage. Nevertheless, if this leverage is misused, they are extremely dangerous.

Option trading is an advance technique of investing in stock market. In understanding option trading, you can sometimes relate the procedures to real estate transactions or maybe leasing a car. In real estate, some real estate investors will lease you a property for an option to buy within a specific date. It's up to you to buy the property when the date of agreements has come. If you don't buy the property, then you lose the money that you paid for the lease and you don't own any equity on the house. If you buy the house on the price agreed upon by you and the owner of the house then of course you keep the equity if the value of the house appreciated from the price you and the homeowner agreed on at the time. If the value of the property goes down at the date of option, then you have the choice of not buying the property. Leasing a car with an option to buy is also quite similar. You can either buy the car or not at the end of the leasing agreement. The only difference is that you don't get any equity since the value of most automobiles depreciates quickly over a short period of time.

In the world of stock market, option itself is considered a security. It is the most versatile security ever invented since the amount of premium you have to pay for an option cost less than the regular market price of a common stock. An option provides you more leverage to acquire large numbers of stocks once you decide to exercise the option. It can be used in a variety of ways to profit from a rise and fall in the stock market.

There are two ways to trade option securities or two terminologies you need to know; "Calls" and "Puts". You can trade options by buying calls option and puts option. Buying calls gives you the right, but not an obligation, to buy a certain number of stocks at a predetermined price and at a certain date. Again, keep in mind that you don't have to exercise the stocks when the expiration date comes if you don't have to but you will lose the premium you paid for buying the calls. Buying puts gives you the right, but not an obligation, to sell a certain number of stocks at a predetermined price at a certain date. In puts, you also don't have to exercise the stocks if you don't have to but then again you lose the amount of premium you pay for the puts. It is very essential to familiarize with the inner workings of the calls and the puts if you want to use option trading.

This column is taken from Erwin Bogs Rempola's second book "5 Advance Money Making Techniques" in Stock Market for Small Individual Investors soon to be released in August 2007. This is the unedited versionand Rempola wants to apologize for any spellings or grammar and composition errors that you might come across while reading this column. His second book is now in work for editing by his publisher and will be released in August 2007.