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Options are a kind of investment that provides you the right to buy or sell an underlying security at a certain price for a specified amount of time.

Put simply, options provide you with the right to guess on the direction of a stock, but you're limited to that guess for a certain period, typically from one month to as long as 3 years depending on the option selected. Let's go thru a couple of examples with various scenarios to ensure that you'll be able to see how options can lead to magnified returns with low risk.

Say you think that the demand for gas within the refinery business will send Valero's stock higher. Earnings for the stock come out in June, and you're guessing the market is going to be incredibly surprised at how the business surpassed their earnings estimate for that quarter.

In such a case, you'd look to purchase "call options" on Valero. Call options are a wager that the underlying stock price will go up. Put options, on the other hand, are guesses that the underlying security's price will go down.

A sensible move would be to give yourself just a little time to make sure that you're right about the trade, but not an excessive amount of time that it is actually cost-prohibitive for you to make the trade. Options are referred to as "wasting assets" since they lose value the longer you hold onto them.

Also, the longer the amount of time before the option expires, the more premium you are going to pay. Premium will be the price you pay for the option. A costly option has a high premium; an inexpensive one has a low premium. Option premiums are dependent upon the market, just like stocks. And options are traded on an exchange, just like stocks.

Options may be used for a number of strategies but, above all, options permit you to control blocks of stock quite cheaply while limiting your risk to the value of the option itself. Options used this way with good directional methods and systems can produce huge profits when employed effectively.

Options are not the only way to yield substantial profits, as going public with a company will produce the exact same result. If you own a company, but don't know how to go public you can certainly find a company going public on the internet.

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