Options trading is a sector of the stock market that is fairly easy for most newbies to investing. If you've never heard of options trading or you just want to learn more about how to make money with this method, we're going to go over all of this below.

What Is Options Trading?

Options trading is purchasing the ability to buy or sell a specified number of stock for a set price in the future. With options trading, you're not actually purchasing ownership or stock in a company. Rather, you're purchasing the opportunity to buy or sell ownership or stock of a company in the future. Let's look at some common terms involved in an options agreement so you can better understand what it's all about.

Expiration Date

Options contracts come with a few key terms that you'll need to understand. First, each options contract has an expiration date. You can exercise your options contract up through the expiration date. After the option has expired, you no longer have the ability to exercise the agreement.

Stock

Each option contract is for a particular stock. When looking at options online, you'll see the ticker symbol of the company that the options contract is regarding. When you purchase your options contract, you don't get ownership of the stock. Rather, only when you exercise your option do you get to actually buy ownership via the stock.

Strike Price

The strike price is a very important number to understand as it determines how and when you exercise your options agreement. The strike price is the price at which you can buy or sell stocks that were included in your options agreement. For example, if the strike price is four dollars for a call option, then you could exercise your contract by purchasing the identified stock at the strike price.

Call or Put

Every options contract will be either a call or a put. In the stock market, a call is when you buy a stock. A put is when you sell a stock. Therefore, you can purchase an options contract that gives you the ability to buy or sell a stock at the agreed-upon strike price before the expiration date.

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How Can You Make Money With Options Trading?

If you're thinking about making money trading options, there are various ways you can do so. By understanding the basics of call and put options, you can start to formulate your own method for making money. Let's go over a few examples of basic options to get you started.

A Call Option

A call option is ideal to purchase when you know that a company's stock price is likely to rise in the near future. For example purposes, let's say that you buy a call option for 100 shares of stock ABC that has a strike price of $50 and an expiration 30 days from now. Fast forward 20 days and you notice that the stock price of ABC has increased to $60 per share.

You'll want to exercise your call option. This means that you can purchase 100 shares of ABC for $50 per share. Then, you can turn right around and sell those stocks at the current market rate of $60 per share. That's a $10 per share profit from your call option.

A Put Option

The other common type of options contract is a put option. This option agreement gives you the ability to sell stocks in the future at a set price. You'll want to use this type of option when you know that a company's stock is likely to decrease in the near future.

For this example, let's say you're looking at an options contract for company XYZ. The options contract is for 30 days, 100 shares of stock, and sports a strike price of $30 per share. The day before your options agreement expires, the stock price of XYZ drops down to an all-time low of $10 per share. You can exercise your options contract.

You'll start by purchasing 100 shares of stock XYZ on the market for $10 a share. Then, you'll go ahead and sell those shares according to your options contract sale price of $30 per share. You'll be able to profit $20 per share with this method.

As you can see, there are various ways to make money with options trading. Understanding the basics above can give you a great foundation to which you can build upon to create your own unique methods for options trading.