What exactly is Option trading?

An option is the right to buy or sell a certain amount of stocks, an index or another sort of investment at a certain price and at a certain time. Usually this right can only be exercised on one special day which is fixed in advance. Some options in Europe enable the investor to exercise the option during a certain period of time. Example: A stock is trading at $40; the right to buy one stock at the price of 39 is worth $1. If the price falls below the strike price of 39 the option is not worthless until the day of expire due to the fact that the stock might rise above that level. If the price is higher than 39 the option is "in the money" if below (out of the money) if exactly or approximately at the strike price it is called "at the money". The main advantage of options is the fact that you have to invest only a small part of the money you would need to invest to have the same opportunities. If the stock price rises from 40 to 42 the inner value (stock price-strike price) has risen from 1 to §3. An increase of 5% of the stock led to a profit of 200%. If the price falls, you lose a higher percantage of your money. If the price falls below the strike price and closes there on the last day your investment is worthless.