There are no items in your cart
Add More
Add More
| Item Details | Price | ||
|---|---|---|---|
An insight into the most heard and underrated form of trading , options trading , risk takers hop on....
Mon Mar 7, 2022
Options give you, well, options for diversification. And while the risks can be high, so can the rewards. You may have heard that getting started with options trading is difficult, or it’s only for the most advanced investors. The reality is options are something virtually any investor can try — with the right know-how.
Interested in getting on the options trading bandwagon? Here’s an overview of options trading that cuts through the jargon and gets right to the core of this versatile way to invest.
Options trading can seem more complicated than it is. If you’re looking for a simple options trading definition, it goes something like this:
Options trading is the trading of instruments that give you the right to buy or sell a specific security on a specific date at a specific price.
An option is a contract that’s linked to an underlying asset, e.g., a stock or another security. Options contracts are good for a set time period, which could be as short as a day or as long as a couple of years.
When you buy an option, you have the right to trade the underlying asset but you’re not obligated to. If you decide to do so, that’s called exercising the option.
If you’re a DIY investor diving into options with a self-directed account, you’re in full control of your trading decisions and transactions. But that doesn’t mean you’re alone either.
Plenty of communities bring traders together to discuss things like current market outlook and options trading strategies.
Listen to the latest episode of the Options Playbook Radio or watch our free, weekly Stock Play of the Day YouTube show covering stock market moves and options strategies.
To form your knowledge base in options trading, start by getting familiar with the different types of options you can trade. The two basic categories of options to choose from are calls and puts.
A call option gives you the right to buy an underlying security at a designated price within a certain time period (think of it as calling the underlying security to you.) The price you pay is called the strike price. The end date for exercising a call option is called the expiration date.
Call options can be American-style or European-style. With American-style options you can buy the underlying asset any time up to the expiration date. European-style options only allow you to buy the asset on the expiration date.
A put option is the opposite of a call option. Instead of having the right to buy an underlying security, a put option gives you the right to sell it at a set strike price (think of this as putting the underlying security away from you.)
Put options also have expiration dates. The same style rules (i.e., American or European) apply for when you can exercise them.
Options trading is something you can do via an online brokerage account that allows self-directed trading. In terms of the mechanics of how to trade options, here are a few key points to know.
When you buy a put, you’re buying a contract that gives you an option to sell a security by a certain expiration date at a certain price. Before buying a put, a few things to consider include:
Buying put options can make sense if you think the price of the underlying asset is going to go down before the expiration date. If you buy put options at one strike price, then the asset’s price drops, you can exercise your option at the original strike price.
For example, say you buy a put option for 100 shares of ABC stock at $50 per share. Prior to the option’s expiration date, the stock’s price drops to $25 per share. If you choose to exercise your option, you could still sell the 100 shares of stock at the higher $50 per share price.
Buying a call means you’re buying a contract to purchase a particular stock or asset by a set expiration date. When buying call options, it’s important to consider the same factors that you would when buying put options.
Buying call options can make sense if you think the price of the underlying asset is going to rise before the expiration date. For example, say you buy a call option for 100 shares of ABC stock, only this time you’re hoping for a price increase.
Your call option contract gives you the right to buy shares at $50 each. Meanwhile, the stock’s price climbs to $100 apiece. You could effectively use a call option contract to buy that stock at a discount.
Options based on equities, more commonly known as “stock options,” typically are a natural lead for traders new to options. Stock options are listed on exchanges like the New York Stock Exchange in the form of a quote. It is important to understand the details of a stock option quote before you make a move.
There are five parts of a standard stock options quote:
Options pricing can be calculated using different models. But at its core, options trading prices are based on two things: intrinsic value and time value.
An option’s intrinsic value represents its profit potential, based on the difference between the strike price and the asset’s current price. Time value is used to measure how volatility may affect an underlying asset’s price up until the expiration date.
The stock price, strike price and expiration date can all factor into options pricing. The stock price and strike price affect intrinsic value, while the expiration date can affect time value.
As with any other investment strategy, options trading has its benefits and drawbacks, and it’s important to understand these potential advantages and risks to avoid making costly mistakes.
In terms of advantages, options trading can offer flexibility as well as liquidity. Compared to other investment options, you may be able to invest with smaller amounts of capital. Options can be used to create downside risk protection and diversify your portfolio. And a savvy options trader could generate substantial returns.
On the other hand, options trading can be much riskier than buying individual stocks, ETFs or bonds. Predicting stock price movements can be difficult and if your guess about a particular security turns out to be wrong, options trading could expose you to serious losses. For that reason, it’s important to consider how options trading aligns with your overall goals and risk tolerance.
Once you’ve mastered options trading basic concepts, you may be interested in more advanced options trading strategies. As you become more comfortable with options trading, your investing efforts may include some of these commonly used techniques.
A covered call strategy has two parts: You purchase an underlying asset. Then you sell call options for the same asset. As long as the stock doesn’t move above the strike price, you can realize profits by selling call options for the assets you own.
A married put strategy involves purchasing an asset and then purchasing put options for the same number of shares. This approach gives you a measure of downside protection by allowing you the right to sell at the strike price.
A long straddle strategy involves buying a call and put option for the same asset with the same strike price and expiration date at the same time. This approach may be used when an investor is unsure which way prices for the underlying asset are likely to move.
Launch your Graphy