If you are just starting your options trading training, you may not yet understand where these ‘options’ come from. If I buy a call option, I am agreeing with another party that I can choose to buy the corresponding shares from that party, at the agreed price, at any time up to the expiry date of the option. But, as in any deal, there are two sides to this trade.

If I can buy the option from the other party, then he is selling the option to me. He can do this because he actually owns the corresponding shares, so he can supply the shares to me if I choose to exercise my option in the future.

Why would he do this? Well, if I am buying the option because I have an expectation that the price is going to rise above the agreed option price (the ’strike price’), then you can see that his expectation must be the opposite – that the actual price will remain below the strike price, in which case I am not going to exercise my right to buy at the strike price.

So what? So, I paid him for the right to buy at the strike price – if I don’t exercise my right to buy, then he simply pockets the price I paid for the option, and it is pure profit to him.

It’s a gamble for both sides – if the market price rises above the strike price, the buyer of the call option is in profit; if it doesn’t, the seller keeps the price paid for the option and he is in profit.

But look – this ‘other party’ is not some special magic kind of dealer – he is just someone who owns the shares on which he is offering to sell an option. If you have a portfolio of shares, there is nothing to stop you offering to sell call options on your shares. You get an immediate payment for the option, and either you simply keep it, or you have a guaranteed sale price for your shares.

As you might expect, there is a similar situation for put options – someone has to be selling the put options in order for you to be able to buy them.

As a further variation, and somewhat more risky, you can sell an option for shares you do not currently own. This gets you an income from the sale in the short term, but if you are on the losing side of the gamble then you have to go and buy the shares at the current market price.

As you go further into your options trading training, you will begin to understand the risks and benefits, and your trading will move from gambling to sound investment.

If you are going to invest in the stock market, I believe you need a much more hands-on approach than buy-and-hold. Even so, a few hours portfolio management per week beats a full-time job. With a more active approach, investing in the stock market can be a wealth-building programme, not just a place to park your existing funds with a view to a slightly better return than the banks will produce.

There are many different approaches to managing your investments rather than buy-and-hold. One area worth looking at is options trading – when you buy options, you are not acquiring the stocks themselves, you are buying the right to make an agreed trade at some point in the future. This can be used when the stock values go up OR down, by buying the right kind of option. There are 2 basic kinds of options:

Call options – these give you the right, but not the obligation, to buy shares at an agreed price on or before an agreed expiry date. If the actual price of the shares rises above the price agreed in the option, then the holder of the option can make a profit by buying the shares at the option price, and immediately selling them at the higher market price. But there is no need to do this buy/sell transaction, since the option itself has an intrinsic value in this situation and can itself be traded.Put options – these give you the right, but not the obligation, to sell shares at an agreed price on or before an agreed expiry date. If the actual price of the shares falls below the price agreed in the option, then the holder of the option can make a profit by buying the shares at the market price and immediately selling them at the higher option price. Again, there is no need to do this buy/sell transaction, since the option itself has an intrinsic value in this situation and can itself be traded.

Because options values vary with the margin between the market price and the agreed option price, the option prices change by a much greater percentage than the prices of the shares themselves. It is not at all uncommon for options to change 50% in a week – 3 of my last 5 trades have gained over 50% in a week.

There’s a lot to learn about option trading, but for the small investor I recommend taking a look at this as an active investment strategy in preference to the passive buy-and-hold approach.