Stock options can be extremely powerful investment tools if used correctly. If they are used incorrectly, however they can be a very bad thing. So, what are options, and how do you trade them?

A stock option will give the buyer the right to either buy a stock at a specific price if it is a call option or sell the stock at a specific price if it is a put option. This helps investors to profit from moves in the stock without having to go out and buy the actual stock.

For example if stock XYZ was trading at $45 and you buy the $45 call option you would have the right to buy the stock in the future at $45. So if the stock goes up to $55 you could buy it at $45 and sell it at $55.

In this way they can definately help you to get a great return in a short period of time. There is only one problem with buying options. In this example if the stock fell below $45 by expiration the option would expire worthless and any money you used to buy it would also become worthless.

So the downside to options is obvious, with option trades an investor is risking 100% of the money that they put into it. But it also has a huge reward potential if that option makes money. In order to start trading options it is important to have some experience trading stocks beforehand.

Going strait torwards option trading when you first get into the stock market can be one of the biggest mistakes you can ever make.

However let us say that you have already been trading and have been doing well, you may want to increase your returns by trading options. You may be woundering how to purchase stock options. You can buy stock options just as easily as you can buy stocks. However some brokers may have to preapprove you for option trading so you would have to file for it.

Trading options can be extremely profitable, but also extremely risky. If you want to get consistency in the option world it is important to create a plan and stick to it.