Most people want to be an investor
But most investors don't understand options
Here is the simple guide to options:
But most investors don't understand options
Here is the simple guide to options:
Options trading is a type of investment strategy that allows traders to buy and sell options contracts.
They are financial instruments that give the owner the right (but not the obligation) to buy or sell an underlying asset at a specific price within a specific time frame.
They are financial instruments that give the owner the right (but not the obligation) to buy or sell an underlying asset at a specific price within a specific time frame.
Note:
1 option contract is always the equivalent of 100 shares.
1 call option is the right to buy 100 shares while 7 call options means the right to buy 700 shares.
*This is the same for put option contracts*
All option contracts are a multiple of 100.
1 option contract is always the equivalent of 100 shares.
1 call option is the right to buy 100 shares while 7 call options means the right to buy 700 shares.
*This is the same for put option contracts*
All option contracts are a multiple of 100.
Note:
Each option has a "strike price" and an "expiration date"
The strike price is the price at which you can buy or sell the stock at.
The expiration date tells you how much time you have to exercise the right that the options gives you.
Each option has a "strike price" and an "expiration date"
The strike price is the price at which you can buy or sell the stock at.
The expiration date tells you how much time you have to exercise the right that the options gives you.
1/ Options trading is a popular way for investors to generate profits in the financial markets.
One of the key benefits of options is that they allow traders to control large amounts of underlying assets with a relatively small amount of money.
One of the key benefits of options is that they allow traders to control large amounts of underlying assets with a relatively small amount of money.
2/ There are two types of options contracts: call options and put options.
Call options give the owner the right to buy an underlying asset at a specific price (known as the strike price)
Put options give the owner the right to sell an underlying asset at a specific price.
Call options give the owner the right to buy an underlying asset at a specific price (known as the strike price)
Put options give the owner the right to sell an underlying asset at a specific price.
3/ Let's say an investor buys a call option on a stock with a strike price of $50 and an expiration date of 3 months from now.
If the stock price increases to $60 during that time, the investor can exercise the option and buy the stock at $50, then sell it for a profit at $60.
If the stock price increases to $60 during that time, the investor can exercise the option and buy the stock at $50, then sell it for a profit at $60.
3A/ However, if the stock price doesn't increase and stays below the strike price, the investor can choose not to exercise the option, which means they only lose the premium they paid for the option contract.
If you risk a lot of premium, you could face a massive loss.
If you risk a lot of premium, you could face a massive loss.
4/ Let's say an investor buys a put option on a stock giving you the right to sell at $200 and an expiration date of 3 months from now.
Even if the stock price decreases to $100 during that time, the investor can exercise the option and sell at $200.
Even if the stock price decreases to $100 during that time, the investor can exercise the option and sell at $200.
4A/ However, if the stock price doesn't increase and stays below the strike price, the investor can choose not to exercise the option, which means they only lose the premium they paid for the option contract.
5/ Another way of investing in options is by simply trading the option premiums.
For example, let's say you buy 10 call options on a stock for $1.00 ($1,000) with a strike price of $150 and expiration of 3 months. Let's say the underlying stock is currently at $140.
For example, let's say you buy 10 call options on a stock for $1.00 ($1,000) with a strike price of $150 and expiration of 3 months. Let's say the underlying stock is currently at $140.
5A/ If the underlying stock price gets closer to that $150, then your call option contract price will keep increasing.
For example if the stock goes to $147, then you could possibly sell your 10 call option contracts for $2.00 ($2,000) or a profit of $1,000.
For example if the stock goes to $147, then you could possibly sell your 10 call option contracts for $2.00 ($2,000) or a profit of $1,000.
5B/ However, if the underlying stock price went from $140 to $135 than your option premium will decrease.
For example, your 10 option contracts that you paid $1.00 ($1,000) for could possibly be worth $0.50 ($500) which would be a $500 loss.
You want call options to increase
For example, your 10 option contracts that you paid $1.00 ($1,000) for could possibly be worth $0.50 ($500) which would be a $500 loss.
You want call options to increase
6/ If you trade the premium of put options, it is the exact same but the opposite of call options.
For example, when you invest in puts you are hoping the price of the underlying stock will decrease.
You buy puts when you think a stock will go down in value.
For example, when you invest in puts you are hoping the price of the underlying stock will decrease.
You buy puts when you think a stock will go down in value.
7/ Options trading can be complex and risky, and it's important for investors to have a solid understanding of how to trade options.
It's also important to have a risk management strategy in place which I will go over in future threads!
It's also important to have a risk management strategy in place which I will go over in future threads!
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