With the improved selection of financial investments, a lot of small investors are diversifying portfolios via the inclusion of stock options. A lot of people who aren't dedicated investors are still acquainted with company stock options as a technique that employers use to reward performance and share profits.

It's great when your company gives you stock options as compensation, but don't make the mistake of thinking it's the same thing as buying stock options on the options market. If you buy the options yourself then you bear the risk of losing your investment. Nothing is really at risk when the company gives you stock options. This shows why a stock option education is important before you get into the market.

Whether purchased by the company, or purchased privately, stock options are nothing more than stock shares wrapped in a contract describing the manner in which the shares may be bought or sold. These contracts are called option trading contracts. Option trading contracts give the buyer the right, but not the obligation, to purchase or sell the described stock shares at an agreed price within a specific time period.

Call options and put options are the two major kinds of option trading contracts. Call options are contracts to buy underlying stock shares; put options are contracts to sell them. The call options designate the holding of a long position on the aforementioned stock, but the put options symbolize the short position.

An investor who purchases a call option profits if the share price rises within the stated time frame. The investor who purchases a put option profits if the share price falls within the specified time period. Purchasing a mix of call and put options on the same underlying stock is a common option strategy of hedging bets by limiting the amount the investor stands to lose, at the expense of the amount the investor stands to gain.

Option contracts, although typically applied to stock shares, may also be applied to any other kind of asset, such as commodities. Through option trading, the educated investor can create profit opportunities in any market, no matter which direction the asset price or broader market takes. Stock option trading is therefore more flexible, but more complicated, than trading stocks themselves.