You may have heard of stock options in the news as a form of executive compensation, but there is much more to stock option trading than that. Any investor can use option trading to leverage profits or to limit losses in a comprehensive option trading strategy.

Option trading has attracted much attention as a quick way of making a lot of money. People interested in this type of trading should be aware that it is very risky and a lot more complicated than it first may appear. Therefore, getting a stock option education is an essential step before you get involved in option trading. This education will likely save you money in the long run.

Option trading contracts represent agreements between the buyer and the seller regarding the purchase of an underlying asset, such as a company's stock. An option trading contract gives the purchaser the right to buy the underlying asset for a specific price within a specific period of time. Although shares of company stock are the most common underlying asset, an option contract can be applied to the sale of any asset from commodities to luxury goods.

If the buyer has bought the right to purchase the asset, this option contract is called an call option. Supposing the buyer has bought the right to sell the asset, the contract is then called a put option. Call options are the holdings of a long position on a asset. As for holding a short period on an asset, this would be called a put option.

You buy a call option if you expect the asset price to rise before the option expires, so you can either exercise the option or sell it at a higher price. If you are wrong and the asset price has gone down, the option will expire worthless and the investor loses the price he paid for it. A put option works the same but in the opposite direction. You buy a put option if you expect the price to fall, and you lose if the price rises.

The practice of stock option trading usually create an opening for growth to profit no matter what direction the value of the asset, or the bigger market takes. Most of the time investors will mix a portfolio of call options and put options into an inclusive strategy while will attempt to close their bets against loss of asset value.