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You may have heard of stock options in the news as a form of executive compensation, but there is much more to stock option trading than that. Any investor can use option trading to leverage profits or to limit losses in a comprehensive option trading strategy.

Unlike employees who receive a small sum of company stock options in compensation for work, small investors who are engaged in trading options are playing a risky game with limited funds. Both the potential reward, and the potential loss, is increased because stock options are more complex investment instruments providing greater leverage to succeed or fail. Therefore, it is imperative the small investor pursue a thorough stock option education before investing significant money in option trading.

Option trading contracts represent agreements between the buyer and the seller regarding the purchase of an underlying asset, such as a company's stock. An option trading contract gives the purchaser the right to buy the underlying asset for a specific price within a specific period of time. Although shares of company stock are the most common underlying asset, an option contract can be applied to the sale of any asset from commodities to luxury goods.

When a buyer purchases the rights to buy an asset, this type of option contract is termed a call option. If, on the other hand, the buyer purchases the right to sell it, it's termed a put option. Call options involve long-term holding of assets, while put options involve short-term asset holdings.

The purchaser of a call choice consequently continues to earn if the asset cost goes up at the particular point. If the asset value decreases, the consumer of the call choice automatically waste the cash put in. Likewise, the purchaser of put choice earns under the stipulation that the asset cost decreases at the certain point. If the asset cost goes up, the consumer of the put choice immediately wastes the cash that went in.

The practice of stock options trading therefore creates opportunities to profit no matter which direction the value of the asset, or the larger market takes. Investors typically mix a portfolio of call options and put options into a comprehensive stock option strategy in an attempt to hedge their bets against the loss of asset value.

You may have heard of stock options in the news as a form of executive compensation, but there is much more to stock option trading than that. Unlike employees who receive a small sum of company stock options in compensation for work, small investors who are engaged in trading options are playing a risky game with limited funds. It is imperative the small investor pursue a thorough stock option education before investing significant money in such trading. The flexibility of stock options trading makes it possible to make money in an up or down market.