As most people already know, an investment is an item or asset that you purchase in the hope that it will generate income in the future or that its value will rise. This means that the idea of an investment is to create wealth. Investment can come in many forms, such as investing in real estate, or in education, or in securities. Now, a security is primarily a contract with monetary value that can be traded, such as stocks (ownership), bonds (debt agreement), or derivatives (rights to ownership). Here, we will learn option trading, which is a kind of derivative.

To learn option trading, you can begin by imagining that your friend owns an old piano that he wants to sell for $500. You want to buy it but you have no cash to purchase it outright. So you give your friend $50 so he will hold it for an agreed period of time, say, a month. He gets to keep the $50 whether you do buy it or not. Now imagine, within the month, either one of these two things happen:

Scenario A: You discover that the piano was once owned by a famous pianist. Its value raises significantly, in this example, $2,000, but your friend cannot change your deal or alter the price. So, you get the item at just $500 plus the $50 you paid to have him hold it. That means you technically have a profit of $1,450.

Scenario B: His cat jumps on the piano and scratches it all up, which lowers its value. You decide not to buy it, so you lose the $50 that you paid your friend, and he can do what he wants with the item after the due date had passed. (You can actually sell your right to buy the piano to someone who knows how to fix it so you lose nothing.)

When you learn option trading, you’ll realize that its concept in the most basic level is the same as the “piano” transactions. The piano is the asset, and the deal you entered (your right to purchase the item at a specific price within a specific period) is options trading.

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date.

Trading options can be very lucrative if you spend the time it takes to learn option trading. It can also be very risky if you’re not well educated in options trading. This is why it’s critical to find a good course to learn option trading from before you jump in.