Options are derivative contracts that give the bearer/buyer the right but not the obligation to trade (buy and sell) the underlying asset at a specific price (strike price) on or before a set date (expiration date). Options are considered derivatives because they derive their value from the underlying asset. For example, the asset could be bonds, currencies, or commodities. Option contracts represent 100 shares of the underlying asset (stock). For beginners, options trading may sound complex or seem overwhelming. So, you need to understand how the stock market works. Read all about getting started on stock trade for beginners on the stock latest website.
There are two types of options, namely;
Call options give the bearer the right but not the obligation to buy the underlying asset at the strike price specified in the contract. Investors buy or sell calls depending on the state of the underlying asset’s price.
Put options– gives the bearer the right, but not the obligation to sell the underlying asset at the strike price specified in the contract.
With a basic idea of what options are, the big question is how one can make money with options?
Can you get rich trading options?
The simple answer is yes. Traders can profit by being an option writer (seller) or an option buyer. Options allow for profit during calm and volatile market conditions since the price of assets (commodities, currencies, and stocks) is always moving.
As a call option buyer, you could use your available cash to buy calls on your favorite stock with the confidence that the stock price will increase before your options contract expires. When the price of your chosen stock skyrockets, you can then sell your options for a profit. For example, since a stock option represents 100 shares of the underlying asset, a trader can decide to buy one call option contract on X stock for a strike price of, say, $10. He pays $100 for the option. If by the time of the options expiration date, X stock shares are selling for $30. The bearer can choose to exercise his right to purchase 100 shares of X stock at $10 per share and sell for $30 thus, earning a profit. This options strategy is relatively low risk as the maximum loss is restricted to the premium paid to buy the call.
However, a put option buyer can only make a profit if the stock price falls below the strike price at the end of the options contract. Buying a put is another strategy with relatively low risk.
Another way to earn a profit trading options is by being an option writer or seller. This means buying put options for stocks whose price you are sure will fall below the strike price by your contract’s expiration date. Then, when the underlying stock price drops, you can exercise your rights to sell the puts and pocket your winnings. Another alternative for someone who has a lot of buying power is to sell large numbers of naked puts on a company whose stock price you predict will be at or beyond the put’s strike price as at the expiration date. The goal here is to take advantage of the underlying stock’s volatility to sell more puts and increase your gain.
A handy tip on trading options– as an option buyer, you should look to buy options with the longest possible expiration date to give you trade enough time to work out. However, when writing (selling) options, look out for contracts with the shortest possible expiration date to limit your liability. Also, try to properly understand the sector to which a stock belongs before you invest.
The first thing you need to remember is that while you can make money trading options, it doesn’t come without risks. It is essential to have a plan, do your research and make well-informed decisions, as each options strategy comes with its risk/rewards. Beginner investors with a lower risk appetite can go for options buying, while more seasoned and confident investors should use options writing (selling).