Options? What the heck are options? Let's keep it simple. Options trade like stocks, and as long as you sell them before they expire your never have to exercise them. What options do is offer you the chance to turn a 1-2-3% move in a stock into a 100%+ gain for you.
If you think a stock is going to move up or down 5%, you could buy an option on the stock instead of going long or short the stock.
For instance you liked EBAY yesterday. EBAY was to report earnings after the close and you thought their earnings were going to be good. You could have went long the stock, or you could buy a call option. When you buy a call option it means you think the stock is going higher. A put option is betting on a decline in the stock.
So you went long EBAY.. congratulations EBAY soared over 14% today. Had you bought $10k worth of EBAY stock you would have made $1,400.
Had you simply bought a call option in EBAY you would have made substantially more money and had to risk much less of your capital.
The EBAY $37 calls closed at $.27. You could have spent $270 on EBAY calls betting on a gain in price after earnings. That would amount to 10 contracts. Those $37 calls hit $4.84 today. That $270 purchase of EBAY calls could have been sold for $4,840 at the high today. $270 into $4,840.
You could have played it safe and went close into the money. You could have spent $1,310 on the $35 calls. While you expected a big move, you wanted to stay close to the money and limit possible losses. You bought ten contracts. Those contracts hit a price of $6.10 today or $1,310 into $6,100 and that is from playing it relatively safe.. Where else can you get these type of returns?
Stock options offer the chance to take a modest return on a stock and turn it into a huge profit.
After trading stock options you may never go back to trading an actual stock again.