Stock option investments can provide financial rewards with limited risk over a set time period. With stock options the investor can take advantage of price swings in either directing by buying call options when a stock goes up and put options when a stock goes down. How to use stock options is explained and covered in a step by step process below.

Stock options are used by investors as a way to take advantage of a stock’s movement on the up side with call option and on the down side with put options. The options are also favored for their limitations to liability. Making money by with stock options requires a potential trader to learn all they can with as with any investment.

You have to understand stock options before you can buy, sell, or exercise the options. You will first need to learn the terms and feature of stock options before you can trade stock options. Then you must understand the difference between owning a stock and a stock option. Deciding with which broker and what stock option you will want to trade is the most important step. Then with the knowledge you have you must execute your trades in a way to maximize profits.

A stock option is a contract between a buyer and a seller for the right to purchase or sell a stock at a fixed price before a set date. The concept might be simple enough but certain terms need to be discussed before going further

Call Option: the option to buy a stock at a certain price before a set date.

Put Option:'’’ the option to sell a stock at a certain price before a set date.

Strike Price: the set price which the buyer of the option can exercise to buy for a call option or sell for a put option.

Exercise: following through with the right granted on the option.

Expiration Date: the date the option has to be exercised or the offer to buy or sell becomes annulled.

Market price: the price a stock is traded on a stock market.

Market to Strike ratio: the ratio is the difference between the price on the options and the market value.

In the money: when the equity market price is above the strike price on a call option and below on a put option.

At the money:’’’ when the equity market price is near the strike price.

‘’’Under water:’’’ when the equity market price is below the strike price a call option or above a put option.http://www.cboe.com/LearnCenter/Glossary.aspx

The option offers a buyer a chance to make money with stock movement without having to put up the entire purchase price of the stock in the case of a call option. While the put offers the chance to sell a stock at a price before the strike price without risking a short position in the stock.

Before you can become the savvy investor you know you are capable of being there is a little research you must do. You have to decide with which broker you want to trade. Then you need to chose which stock you find interesting. And then you must chose which kind of option you believe will make you the most for your investment. ‘’’#Choose a Broker:’’’ You are going to need someone to handle your financial transactions, and for that you are going to need a broker. Decide what any of the broker’s have that is important to you. Some of the factors to consider are fees, research available, speed of transactions, tools for transactions, and reliability among others.

‘’’#Choose a Company:’’’ The equity you chose to risk your money on should be known to you before you make any transactions. It never hurts to begin with companies that you have some knowledge about. Even then you need to do your research. It is good to know what the company’s profit is what its sales are, how it’s stock moves in the market and what the outlook is for the equity.

‘’’#Choose and Option:’’’ Investing in stock options gives you many choices and there are even many exchanges to choose from with the Chicago Board of Exchange (CBOE) being the largest. If you are bullish on a stock a call option is the best choice. While if you suspect a stock is ready for a tumble a put is the money making choice. Date of expiration must always be taken into account since the longer an option is from an expiration date the more value the option will be worth if it is in the money.http://www.youtube.com/watch?v=sQChTusyPJA

Once you found your broker and have decided which company you think is poised for a move it is time to choose the option you want to use for investing. There are many options available so it is important you look at all the factors and questions you need to ask yourself.

1. Do I think the stock price of the company I have researched is going to go up or down? If you think the company is going up you look for a Call Option. If you think the company’s stock is set for a fall a put option is what you must search for.

1. What kind of time do I think there is before the stock price makes a move? Time is a factor in choosing a stock option. Once the expiration date passes there is no way to exercise the right on the option and it becomes worthless. An option has more value, the more time it has left before it expires.

1. Are you planning to trade the option or exercise it? If your option is in the money and are thinking about exercising a call and buying the stock because you think the stock will still go up, you will need the money for the purchase. For exercising a put option you will need stock to sell, but unless you own the stock there makes little sense to buy the stock just to sell it. There will be many people who own the stock if it falls will be willing to buy option to sell it at a higher price.

1. Can you afford to lose the money you have invested in the option? Although options have a limited amount of risk, which is what you paid for the option including brokerage fees, they become worthless if they are underwater on the expiration date. This is the question you must always ask yourself. Don’t risk money you can’t give to lose.

The content in this page is not a substitute for professional financial advice. Please contact a finance professional before using the information presented here.