There are many different types of investment securities or vehicles available to the hopeful investor. The two most-common investment vehicles are Treasurys, such as T-bills or Treasury bonds, and stocks offered by publicly traded companies. A distinguishing feature of Treasurys is that they offer a guaranteed return on investment in the form of a promised interest rate while stocks themselves offer absolutely no guarantee as to ROI. Investors in stocks, though, can make use of various strategies to hedge or lessen their risk of loss, including stock options trading.
In essence, a stock option gives you the right, but no obligation, to purchase or sell a security at an agreed-upon price within a certain time frame. Call options give to their buyers rights to purchase a set number of shares of stock or other securities, called underlying assets, at a preset price, which is more commonly known as its strike price. Purchase of a call option from the trader writing that contract gives you up until the contract's expiry or expiration date to exercise your purchase of the contract's underlying assets. Obtaining a low strike price on any options contract will help increase your profit should you decide to exercise your rights under the contract.
Call option and put option contracts are big business on the securities markets. Put options give their buyers rights to sell the underlying assets in those contracts at previously agreed-upon strike prices. Put options are the opposite of call options, because in a put the purchaser believes the sale price of the securities in the contract will be greater than their purchase price by the time the contract's expiry rolls around. When you decide not to exercise your call or put option contract rights you lose all rights as well as any obligations to buy or sell the shares in that contract. However, traders not exercising rights in call options or put options really only lose the money they paid for those rights, which is usually less than the collective worth of the securities making up those contracts.
When it comes to stock options trading, call options convey a right to buy the securities in those contracts at prices you believe will be lower than what their prices will be at contract expiry. Typically, call or put option contracts are priced in blocks, such as 100 shares per contract. A 100-share call option contract, for instance, might be priced at $50, with the fee paid to the writer being .50 per share or a total of $50 (.50x100 = $50) to gain a right to purchase each share at a preset price by contract expiration.
If you can purchase a 100-share option for $50 to buy a stock at $10 per share, say, and the stock rises to $15 before your option contract's expiry you can exercise your option to buy those shares for $1,000 ($10x100 = $1,000) while quickly selling them for $1,500 ($15x100 = $1,500) or a 50% or $500 profit. If you want to get into stock options trading, understanding how to smartly exercise call and put options is a must. At their most basic, call as well as put stock options contracts are really just variations of the time-honored investment strategy of "buying low and selling high."
It's more complicated to engage in stock options trading than it is to just buy a stock at a low price and sell it at a higher price. However, a major benefit when it comes to trading in stock options is that when it's done intelligently you can limit your "downside," or potential loss as well as increase your "upside" or potential profit. Keep in mind that you're not actually obligated to buy or sell the underlying securities making up a stock option contract unless you exercise your option before the contract's expiry. After all, failing to exercise your option in a stock option contract typically only results in the cost of the premium or fee you paid to the option trader that wrote the contract.
Rookie options traders tend to make one common mistake when first starting out, and it lies in the fact that some take too many risks before they really understand stock options trading. Investors just getting into options trading should make an effort to thoroughly understand what an uncovered or "naked" option is, for example, because ending up holding too many of them can be financially ruinous. Options traders may find themselves in what are called "naked positions," which result when those traders end up writing contracts for options when they don't actually own any of the stocks or securities being sold or bought by their purchasers.
Writing an option contract giving a purchaser the right to buy or sell stock you don't really own in that contract is risky business, though it can be lucrative. Most brokerage houses, though, don't allow new or inexperienced investors to place naked or uncovered option contract orders. New investors entering the stock options trading world should take small, easily handled steps such as basic call or put option contracts, which can also be highly profitable, before they dive into the deep end of the options pool, so to speak. In reality, before you even engage in the business of trading in stock options you should first spend time learning from far more experienced traders willing to share the ins-and-out of stock options.
In essence, a stock option gives you the right, but no obligation, to purchase or sell a security at an agreed-upon price within a certain time frame. Call options give to their buyers rights to purchase a set number of shares of stock or other securities, called underlying assets, at a preset price, which is more commonly known as its strike price. Purchase of a call option from the trader writing that contract gives you up until the contract's expiry or expiration date to exercise your purchase of the contract's underlying assets. Obtaining a low strike price on any options contract will help increase your profit should you decide to exercise your rights under the contract.
Call option and put option contracts are big business on the securities markets. Put options give their buyers rights to sell the underlying assets in those contracts at previously agreed-upon strike prices. Put options are the opposite of call options, because in a put the purchaser believes the sale price of the securities in the contract will be greater than their purchase price by the time the contract's expiry rolls around. When you decide not to exercise your call or put option contract rights you lose all rights as well as any obligations to buy or sell the shares in that contract. However, traders not exercising rights in call options or put options really only lose the money they paid for those rights, which is usually less than the collective worth of the securities making up those contracts.
When it comes to stock options trading, call options convey a right to buy the securities in those contracts at prices you believe will be lower than what their prices will be at contract expiry. Typically, call or put option contracts are priced in blocks, such as 100 shares per contract. A 100-share call option contract, for instance, might be priced at $50, with the fee paid to the writer being .50 per share or a total of $50 (.50x100 = $50) to gain a right to purchase each share at a preset price by contract expiration.
If you can purchase a 100-share option for $50 to buy a stock at $10 per share, say, and the stock rises to $15 before your option contract's expiry you can exercise your option to buy those shares for $1,000 ($10x100 = $1,000) while quickly selling them for $1,500 ($15x100 = $1,500) or a 50% or $500 profit. If you want to get into stock options trading, understanding how to smartly exercise call and put options is a must. At their most basic, call as well as put stock options contracts are really just variations of the time-honored investment strategy of "buying low and selling high."
It's more complicated to engage in stock options trading than it is to just buy a stock at a low price and sell it at a higher price. However, a major benefit when it comes to trading in stock options is that when it's done intelligently you can limit your "downside," or potential loss as well as increase your "upside" or potential profit. Keep in mind that you're not actually obligated to buy or sell the underlying securities making up a stock option contract unless you exercise your option before the contract's expiry. After all, failing to exercise your option in a stock option contract typically only results in the cost of the premium or fee you paid to the option trader that wrote the contract.
Rookie options traders tend to make one common mistake when first starting out, and it lies in the fact that some take too many risks before they really understand stock options trading. Investors just getting into options trading should make an effort to thoroughly understand what an uncovered or "naked" option is, for example, because ending up holding too many of them can be financially ruinous. Options traders may find themselves in what are called "naked positions," which result when those traders end up writing contracts for options when they don't actually own any of the stocks or securities being sold or bought by their purchasers.
Writing an option contract giving a purchaser the right to buy or sell stock you don't really own in that contract is risky business, though it can be lucrative. Most brokerage houses, though, don't allow new or inexperienced investors to place naked or uncovered option contract orders. New investors entering the stock options trading world should take small, easily handled steps such as basic call or put option contracts, which can also be highly profitable, before they dive into the deep end of the options pool, so to speak. In reality, before you even engage in the business of trading in stock options you should first spend time learning from far more experienced traders willing to share the ins-and-out of stock options.
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Before you even think about taking out a stock option make sure you stop by Option Millionaires at stock options trading for the best in options trading advice and training.
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