For most people, stock market is a place of intimidation and confusion. Little do they know that with a little common sense and a substantial amount of research and education, anyone can profit from the market. One of the ways of making it on the stock market is to buy stock options and sell the options for profit. This is the focus of this article.

When you have a good risk to reward ratio. You don’t want to be risking 100% of your option contract to make a 20% return. When trading options you really need to look at risk to reward ratio. Most professional traders use a risk to reward ratio of 2 to 1 which means you have a possible reward of $2 for every $1 you risk.

It is also possible to make money by selling calls. When you sell a call, you are paid a small premium in exchange for assuming the obligation to sell a stock if it reaches a certain price. If you own the underlying stock, this is known as covered call writing. If you don’t own the underlying stock, this is known as naked call writing. Generally, a call writer (seller) hopes that the stock will remain the same or sink in price before the expiry date so that he can keep the premium. Buying Stock Options

Trading your options is one way making a lot of money from the stock market. In fact, there are a lot of investors out there who successfully make profits by doing nothing but trading their options, never taking possession of the underlying security. When trading options, it is important to understand that the price of the option is influenced by the price of the underlying stock. Furthermore, as time goes by, the option looks less attractive because the time left affects the price.

It takes two people to complete a put contract, and the seller can definitely make some money as well. Selling puts is a bit like selling insurance. You collect a small premium, and if the stock drops below a certain price, you guarantee that you will buy it at a previously agreed upon price. Many stock investors will say that selling puts is one of the riskiest option strategies available because your profit potential is limited to the premium you collect, while you can lose a ton of money if the stock falls to zero. Other investors, such as Warren Buffett, exclusively sell puts. They sell puts on stocks they would like to buy, but don’t because the price is currently too high. Buffett only sells puts on good companies, so he knows there is little chance that it will fall to zero.

You can simply purchase stock options without buying the underlying security. Buy Stock Options Stock options can provide investors with dramatic gains if the stock price rises quickly in a short period of time. There are many different ways to make money trading options.