| One of the most complex kinds of securities that | | | | Five months later, before the time expires to buy, |
| experienced investors get involved with is trading | | | | the price of wheat in the markets is $110, but |
| options. Unlike trading stocks in the stock market, | | | | because of your agreement, the farmer must honor |
| options can carry substantial risk for any investor | | | | the price of $70. Seeing as you do not want to pay |
| that does not have sufficient knowledge of how | | | | the current market price, you take the opportunity |
| these securities work. Even for the experienced | | | | to exercise your option. The wheat farmer has to |
| investor, the risk is still much higher than stock picking | | | | honor the agreement you made before, and if you |
| and trading shares. Options can be extremely | | | | were to sell the wheat at current market prices, you |
| versatile and allow you to change and adapt your | | | | would make a profit. If on the other hand in the price |
| position according to and situation. You can hedge | | | | dropped to $55 per ton on the market, you would |
| against a declining stock pick or simply bet on the | | | | not be obligated to buy from the farmer. In this |
| movement of the stock market today or index. | | | | case, you would only lose the $300 fee you paid for |
| Before you can start trading options, you need to | | | | the option. |
| understand what they are. An option gives the buyer | | | | If you are able to perform technical analysis, you can |
| the right, but not the obligation, to buy or sell and | | | | look at past prices and volumes to help you identify |
| underlying asset at an agreed upon price, on or | | | | similar patterns and movement in the markets. All |
| before a specified date. To understand it better, | | | | you need is a historical stock chart of the commodity |
| consider that you own a company that makes flour, | | | | or of the stock. You can then use the results to |
| and you buy large amounts of wheat to make the | | | | forecast future trends or prices. Trading options is |
| four. Because of the volatility of the price of wheat, | | | | very lucrative, but at the same time, it also carries |
| you make an agreement with a wheat farmer to sell | | | | higher risks for the investor. You should only invest |
| you 50 tons at a price of $70 per ton in five months | | | | risk capital when trading options. |
| time. He agrees to this option for a fee of $300. | | | | |