One of the most popular ways to invest money is through stock trading. You can use several strategies to make or lose money based on whether you buy low or sell high. But what if you could get in on this game without actually spending an initial investment?
That’s where options trading comes in. If you’d like, think of it as a way to gamble instead of investing. And while there are plenty of similarities between buying stocks and options, there are also some big differences that must be understood before making any trades with your hard-earned capital.
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You Can Buy and Sell Put and Call Options
As a new trader, you have to keep in mind that an option is a contract that gives you the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price. In order to help guide you toward success with options trading, you have to at least know about buying and selling put and call options.
In addition, financial advisers from https://www.personalincome.org/best-brokers-for-options-trading/ recommend using a trading platform that helps guide new traders. With various platform options available, traders have to carefully select their platforms. Criteria like research data and software, customer service, reputation, and price can help traders make informed decisions in selecting their platforms.
Call options
Call options (also known as “bull” contracts) give you the right to purchase something at a future date for a certain price. If the said option has value in it when expiration comes around, then you can purchase it at its agreed-upon price and make money off your investment if the stock/asset/commodity goes up. For example, let’s say Company XYZ is trading at $10/share, and you think it’ll go to $12 within three months.
You could purchase one XYZ February $10 call for 50 cents which will allow you to purchase 100 shares of XYZ at $10/share between now and February. That option will expire on the third Friday of the month and will become worthless if Company XYZ is still trading below $10/share. But if it’s above $10, then you can buy 100 shares of Company XYZ and sell them for a profit even though they only cost you 50 cents per share to start with.
Put options
On the other hand, put options (also known as “bear” contracts) give you the right to sell something at a future date for a certain price. For example, let’s say Company ABC is trading at $20/share, and you think it’ll go down to $12 within three months. You could purchase one ABC June $15 put for 10 cents (which gives you the right to sell 100 shares of ABC at $15/share anytime between now and June).
That option will expire on the third Friday in June and will become worthless if Company ABC is still trading above $15/share. But if it’s below that price, then you can sell 100 shares of Company ABC even though they only cost you $20/share to start with.
Options Can Be Complementary to Stocks
Given the volatile nature of the stock market, some traders may prefer to use options as a hedge or insurance. This means that if an investor has done research on a company and is bullish on its future prospects, he/she will buy call options of that company.
The Exposure of Naked vs. Covered Calls
While selling covered calls involves taking on additional risk for income seekers — they are selling their stock at a higher price than it’s currently trading at – these positions have limited risk since investors already own shares of the underlying security.
Selling uncovered calls have unlimited risk since there is no limit to how high the call writer can have to sell his shares should he be assigned an exercise notice on his short position. Remember that all options trades entail some element of risk, and all options strategies should be employed only by experienced investors who fully understand the risks involved.
Options Can Be Used to Extract Income From Stocks
If someone is interested in generating additional income from their portfolio through option writing, they have a few different options. This includes selling covered calls or purchasing put options with the intention of being assigned an exercise notice on that position. Since all options have an expiration date, most traders will sell their options contracts before they expire.
Options are complex financial instruments that can be used in a number of different ways — some less risky than others. If you’re interested in using options to enhance your portfolio, do your research and understand what types of options best suit your investing style.
