Options are usually known as a possibility to invest with rather low capital, in hopes of increase or decrease in stock value. Additionally, options make it possible to minimize your risks.
An option gives the owner the Right (but not an obligation) to buy (call) or to sell (put) a certain financial asset (such as stocks) within a specified time frame at a pre-specified price. I’ll repeat, in case of options there’s NO OBLIGATION to make the agreed trade (whether to buy or sell), but you have the right to do that within an agreed time frame at an agreed price and for that you’ll need to pay. The price you pay for the option is usually called the permium and the maximum amount you can lose is the premium (thus all you paid to buy the option).
One option contract is usually per 100 shares. To beginner traders this might sound like forex trading where you can trade with huge leverage. To explane, I’ll bring an example about trading with options – You buy an option for the company XXX for the month of October with the stock price of $50 and $3 premium. Cnsidering the average option contract size (100 shares) your cost to buy the option is $300 (100*3). This option gives you the right to buy 100 XXX stocks within in October for $50 per share. Your maximum loss can be the $300 premium. Your winning potential is pretty much endless. For example if the price of the stock increases to $60, you have won $1000 (100 stocks times $10). Now you have two possibilities – you can either buy the stocks at the price of $50 per share or you can sell the option which value has most likely also increased accordingly. If by the end of October the price is below $50 or you haven’t done anything with your option you have lost your $300 premium.
For examples about trading with options and more information about it, keep coming back often, I will be trying to cover as much about investing as possible – general information, analysis, stocks, forex, options...whetever else.
PS: Don’t go trading yet, there’s still lots to learn!