Making a living by trading stock on the stock market may sound appealing. You can sit at home and work in pajamas and shorts. Though the entire picture sounds pleasing, it's not that easy owing to the fact that trading common stock and stock options is quite difficult. On the other hand, hard and enthusiastic work, often tends to yield a substantial profit.
Stock Options: Instruments of Trade
Stock options belong to a category of trade-able securities which are categorized as derivatives. In finance derivatives are chiefly contracts which are based upon their individual underlying securities. In case of stock options, for example, stocks are the underlying securities, whereas option is the contract.
A stock option is a contract which gives a party an option or a right, but not the obligation to either buy or sell the stock at an agreed price predetermined, within a said period or on a single date.
As the name indicates, common stock of a certain company is the underlying asset/security upon which the contract is based. Now this right or contract can be brought and sold or it can also be exercised (used) to attain certain profit.
Trading Stock Options for a Living
There are two primary ways or methods with the help of which stock options can be used to make an entire living. However, please note that trading stock options also means that you have to be a really good stock trader. After all stock trading is the mother of stock option trading.
In fact, everyday trading and movement of stocks and stock options in their individual markets largely depend upon each other.
Several stock exchanges such as Chicago Mercantile Exchange (CME), Kansas City Board of Trade (KCBT), Minneapolis Grain Exchange (MGEX), North American Derivatives Exchange (Nadex) and several others, within the United States cater to the stock option trading.
Hence you will have to trade through the brokers of this market. Now the actual trading of the option (right) is done exactly like stock trading. The actual 'making' of the option or exercising its rights is just a bit different. Here is how it is actually done in most of the cases.
Making a Call and Put
Now when you are trading in the common stock markets, your primary objective is to buy at a low and sell at a high or aim for stocks which give a great dividend or aim for stocks which show a combination of the two. On the option side you can have two primary strategies:
☛ Market prices are either on the rise or on the fall. Hence in this case, you can make money by buying an option, the underlying stock of which is going to have a rising market value. Then you can sell the option to some other party at a value that equates the value of stock, plus commission charged plus any market price elevations.
☛ Your second option is to exercise the right. If you are holding an option, the underlying stock value of which is exceeding the predetermined stock option value. Once you have exercised the option, you have purchased the stock at a price which is lower than the market value of the stock. Thus you can sell off the stock for a profitable market value.
Such an option of purchasing is known as a 'call'. The 'put' option is for sale of stock. In cases where the market price of the stock drops down below the predetermined market value, you can sell (actually get rid of the stock) the stock at a profit, by exercising the options. However, such circumstances are not quite common.
Thus trading options for living can be profitable, however, there is a lot of research and hard work involved, and you would also have to gain a considerable mastery over the common stock market.