Learning How to Trade Options

Many people think investing is all about buying and selling stocks. While the buying and selling parts are correct, there are so many other financial vehicles you can work with. Options are another fine option as they can dramatically increase in value and often at lower risk to you. If you’re curious about learning how to trade options, then continue on and find out more.

What are Options?

Buying a share is buying part of a company. That’s simple enough to grasp and it’s the most direct way of investing. It’s time for some options trading 101. An option is similar, but it’s more about a projected value rather than what the stock is worth right now. Options are buying a contract, or the option to, buy a certain stock at a certain time at a certain value.

For example, if a stock is worth $100, then you’re buying it near that price and that’s it. With an option, you’ll buy a contract stating that you can buy that same stock at $120 several days from now. The contract itself is much cheaper than buying the stock outright. Not only that, but there’s the chance that the stock will be worth more than that. If the stock does really well and gets to $150 per share, then you’re making $30 for each share.

According to the experts at Money Morning, “the trick is knowing what price and dates are the right ones to produce the gains you want.”

How to Profit from Options

There are several ways of profiting from options. If the strike price, or the value listed on the options, is in your favor, then you can stand to profit from each share purchased through the option. You can also sell the option and make money with very little investment.

While it’s ideal stock goes up, you can also profit if the stock price goes down. This will be explained later, but an option can also allow you to sell shares at a certain price even if the actual value is lower. While difficult, you can truly profit from options regardless of how the market is going.

What are Calls?

There are two ways of settling your options contract known as calls and puts. Calls are considered the ideal option since you can buy the shares at the price specified on your options contract, or the strike price. This is best when you think the market value will be higher than the options value. You’re able to buy the shares at a discount or you can sell the options for big gains.

What are Puts?

A put is another way to profit with options, but it’s the opposite of a call. With a call, you’re hoping the stock value will increase beyond the strike price. With a put option, you’re hoping the stock value will fall below the strike price. A put option gives you a contract stating that you can sell the shares at the strike price regardless of the true stock value.

For example, if the put option is for $100 per share and the true value is $80, then you’re making $20 per share once the put option goes through. In this case, you’ll be hoping the true value falls more so that you profit more from the sale.

Options can be tricky, but known when to do a put or call can help you earn a significant amount of money. Be sure to learn about this fascinating financial vehicle and increase your profitability.

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