The common definition of option trading is the making of a two-party contract where one retains the right to purchase or sell a fixed amount of the underlying security at a set price and within a fixed period of time, although he or she is not obligated to do so. The evident opportunities for profit have caused an ever-increasing number of speculators to enter this field.

Option trading is something that investors can use so that they can keep their portfolio of stocks safe against sudden downward pressure. This is a cautious strategy where puts are purchased to act as a hedge. Investors then buy the right to sell stock which is already owned at a certain price no matter what the current market is doing. Suppose the price of the underlying stock keeps rising instead of falling, the strategy will then have a limit to the portfolio's upside chances of reducing it by the cost made with the purchase of the puts.

Another conservative option strategy is sell calls while owning the underlying stock. This is called covered call writing; it is a strategy often used by investors to generate additional income on stocks already in their portfolio. This strategy provides limited downside protection in case stock prices fall.

If stocks don't take too severe a nosedive, a covered call writer can lessen the impact of a decrease via receipt of the call sale premium. On the other hand, should stocks plunge precipitously, a person who invests will still suffer a loss, since the amount of the premium will not be as great as the amount lost by the underlying securities.

Investors with a high level of risk tolerance may wish to leverage relatively moderate sums of money. Buying options is associated with rights but not obligations. Traders may purchase calls with the expectation that they will be able to sell these later at a profit- if the price of the underlying security goes up. Speculators buying call options or selling put options, hope to profit from rising prices.

If you think the price of the underlying security will go down, then you make money by buying a put now and selling it at a higher price later. To benefit from falling prices you make money by buying puts or selling call options. This is a way to leverage profits but it also leverages losses if you bet the wrong way. If are betting on increasing prices and the option expires before the price goes up, you can't lose more than the amount you paid plus commissions.

On the other hand those speculators who sold options can loose quite a bit more than the premium they received for selling them. In case you are not able to understand all of the terminology of option trading, you can freely access the dictionary as a part of stock option education.