Before learning the basics of options trading and strategies, it is important to understand the types, costs and risks before opening an options account for trading. This article will focus on stock options vs. foreign currencies, bonds or other securities on which you can trade options. This piece will focus primarily on the buy side of the market and the trading strategies used.
What is a stock option?
An option is the right to buy or sell a stock at the strike price. Each contract on a stock will have an expiration month, an exercise price, and a premium, which is the cost of buying or shorting the option. If the contract is not exercised before the option expires, you will lose the money invested in your trading account from that contract. It is important to know that these instruments are riskier than owning the shares themselves because, unlike real shares, options have a time limit. There are 2 types of contracts. Calls and Puts and how to trade them and the basics behind them.
What is a call option and how to trade them?
A call option contract gives the holder the right to purchase 100 shares of stock (per contract) at a fixed strike price, which does not change, regardless of the actual market price of the stock. An example of a call option contract would be:
1 PKT December 40 call with a $500 premium. PKT is the stock you are buying the contract on. 1 means an option contract representing 100 shares of PKT. The basic thinking and learning how to trade call options in this example is that you’re paying $500, which is 100% at risk if you don’t do anything with the contract before December, but you have the right to buy 100 shares at 40. So if PKT shoots up to 60. You can exercise the contract and buy 100 shares at 40. If you immediately sell the shares on the open market, you would make a profit of 20 points or $2,000. You paid a premium of $500, so the total net profit on this option trading example would be $1500. So the bottom line is that you always want the market to go up when you are long or have bought a call option. .
Business strategy vs. Exercise and understanding of premiums
With call options, the premium will increase as the market for the underlying stock rises. Buyer demand will increase. This increase in premiums allows the investor to trade the option in the market for a profit. Therefore, he is not exercising the contract, but changing it. The difference between the premium he paid and the premium he sold for will be his profit. The benefit for people looking to learn how to trade options or learn the basics of a trading strategy is that you don’t need to buy a stock outright to benefit from its rise with calls.
What are put options?
A put option is the reverse of a call contract. Put options allow the contract owner to SELL a stock at the strike price. You are pessimistic about the stock or perhaps the sector the company is in. Since selling a stock short is extremely risky as you have to cover that short and the repurchase price of that stock is unknown. Be SO wrong and you’re in for a world of trouble. However, put options leave the risk at the cost of the option itself: the premium. Learning or getting information on how to trade puts starts with the above and looks at an example of a put contract. Using the same contract as above, our anticipation of the market is completely different.
1 PKT Put on December 40 at a premium of $500. If the stock goes down, the trader has the right to sell the stock at 40, no matter how low the market goes. You are bearish when you buy or have long put options. Learning to trade or understand put options starts with the direction of the market and what you have paid for the option. Any basic strategy you adopt in this contract must be done before December. Options typically expire towards the end of the month.
It has the same 3 trading strategy options.
Let the option expire, usually because the market is up and it’s not worth trading, or exercising your right to sell it at the strike price.
Exercise the contract: The market is down, so you buy the stock at the lower price and exercise the contract to sell it at 40 and make your profit.
Option trading: The market went down, which pushed the premium up, or the market went up and you’re just looking to get out before you lose all of your premium.
Options trading carries good leverage because you don’t have to buy or short the stock itself, which requires more capital.
They carry 100% risk of the premiums invested.
There is an expiration time frame to take action after buying options.
Trading options should be done slowly and with stocks you are familiar with.
I hope you have learned some of the basics of call options trading, investing and how to trade them. Look for more of our articles. Training in American investments.
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