Trading Options

Trading stock options is similar to making a bet. For example, imagine stock XYZ is worth $10. If an investor thinks stock XYZ is going to hit $11 one week from now, they can buy a call option and say that it will do so. Let's say their option contract is cost $500. If stock XYZ does hit that price before or at the date they said it would, then they will make a profit. If stock XYZ does not hit the target price, then their contract expires worthless and they lose all of the $500.

Now that the risks have clearly been stated, the benefit to playing options is that the returns are larger for guessing what the price would be and what time. The stock market is basically rewarding investors more of a return for placing a riskier bet and winning it.