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Your Options Handbook: The Practical Reference and Strategy Guide to Trading Options by Jared A. Levy

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Chapter 1

Market Basics and Market Mechanics

What Is Going On and How Does It All Work?

[New market] complexity suggests that there is no longer any room for the individual investor in today’s institutionalized markets. Nothing could be further from the truth. You can do as well as the experts—perhaps even better.

—Burton G. Malkiel A Random Walk Down Wall Street

As long as humans and cultures have been exchanging and trading goods, price has been at the center of that trade. This is true whether it took 10 bags of rice to purchase a goat or 150 U.S. dollars to buy a barrel of oil. Discovering a price or value of goods, commodities, housing, land, and so forth has been essential to cultural sustainability, global social and economic growth, and in the end, for some, prosperity. It has also led to the demise of great nations for that matter. This chapter explains the basic mechanics of the marketplace and offers insight as to how stocks are traded and valued.

THE MARKETS

Trading and speculating on prices is in our nature. It takes place every day around us. For most of us the forever changing price of gasoline is the first exposure we get to the marketplace, although many don’t even realize it. The price you see at the pump is determined by supply and demand, along with people called speculators (folks who don’t really want to own anything, but rather take risk on prices going up or down) and by our friends at the Organization of the Petroleum Exporting Countries (OPEC), who actually ...

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