With the financial landscape changing rapidly and traditional investments putting people in the red rather than in the black, Options Trading looks less like a risky venture and more like a speculative endeavor that can both be a great way to limit losses and create quick profits with little starting capital.

Savvy investors come to the table prepared, and they will approach Options Trading with a system. Options Traders should be aware of the relationship between risks and rewards when investing, and they will appreciate the versatility of this particular investment vehicle.

Options are highly traded on the stock market as well as futures (commodities) exchanges. Options can be traded on items such as individual stocks, commodities (oil, gas, corn, gold), interest rate products (bonds, bills, cd’s), indexes (Dow Jones, SandP 500) , and even currencies (US Dollar, Yen, Euro, Swiss Franc).

A Strike Price is the price selected by the options trader for buying or selling their chosen financial instrument on a future date. The Strike Price is important because it will determine whether or not the investor will purchase or sell their option.

Options can be used with a put (sale) or with a call (purchase). An options trader will decide to purchase or to sell their option based upon their own systematic approach to this type of investment. The decision to put or to call is important, and it relates to your strike price.

The right, but not the obligation, to sell is called a Put. Investors who expect a price decrease would use a put to sell their option for a profit if the price of the financial instrument is below their strike price. If the financial instrument price is not below the strike price, their loss is limited to the cost of the put.

A Call option is an option that gives a person the right to buy an item but not the obligation. When a person expects the price of the item in question to go up, they would purchase a call. Thus, if the price goes up, a call owner has the right to purchase it at a lower price. The call owner can also sell this option for a profit. And like a put, should the item in question not go up in price, the owner of the call is limited in their loss to just the cost of the call.

Investors who decide to purchase an option are limited in their amount of risk exposure. Selling an option will expose investors to the most risk. Selling occurs for approximately fifteen percent of all options, while the other eighty-five percent expire.