What Are Options?
Options can be pretty powerful if they are used right. They could also be the fasest way to go broke if they are used wrong. So, what are options, and how do you trade them?
A stock option will give the buyer the right to either buy a stock at a specific price if it is a call option or sell the stock at a specific price if it is a put option. This helps investors to profit from moves in the stock without having to go out and buy the actual stock.
For example if stock XYZ was trading at $45 and you buy the $45 call option you would have the right to buy the stock in the future at $45. If the stock goes up to $55 before the option expires you could use your option to buy the stock at $45 and then go and sell it at $55.
This would give you a spectacular return on your money in a short period of time. There is only one problem with buying options. In this example if the stock fell below $45 by expiration the option would expire worthless and any money you used to buy it would also become worthless.
So the downside to options is obvious, with option trades an investor is risking 100% of the money that they put into it. But it also has a huge reward potential if that option makes money. Before you start trading stock options realize that it is risky and it is probably a better idea to start trading regular stocks first.
Going strait torwards option trading when you first get into the stock market can be one of the biggest mistakes you can ever make.
But let’s say you have been doing well trading stocks and want to increase your returns by buying options. You may be woundering how to invest in options. You can buy stock options just as easily as you can buy stocks. However some brokers may have to preapprove you for option trading so you would have to file for it.
Trading stock options sets the bar up a little higher, both in risk and return. In order to create any sort of consistent gains with it you need to create a plan of action and stick to it.
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