What is option trading and how to earn money with option.
For anyone who is uncertain about how the stock market will act in the near term—and that describes just about every stockholder—options present tremendous opportunities. They let you leverage your investment capital, give you greater flexibility when making in-vestment decisions, and allow you to tailor your risk to fit your personal comfort level. In short, options can be used effectively for a number of different purposes, including the three primary ones we will address in this article which cover using them: (1) to speculate in the market for profit, (2) to earn income and enhance your investment returns, and (3) to protect against a temporary decline in a stock’s value, or to hedge your entire portfolio against market risk.
The Benefits of Trading with Options A key benefit options offer over other investment vehicles is that an option trader can profit in either an up or a down market.When you buy an option, you are hoping that the underlying stock will move in the direction you want. If you’re right, you make a profit. If you’re wrong, you lose money. But it’s really all a matter of two things: Time—since the option contract always expires at some point, and timing. Consistent with all forms of investing, timing is everything in options trading. This article attempts to show how adding options to your trading arse-nal can help you better reach your investment goals. How you use op-tions depends on what you hope to achieve and how much risk you can afford to take. Some investors think of options only as a stand-alone and speculative product. And they can certainly be used that way. How-ever, the potential uses of options go far beyond pure speculation—as wewill endeavor to demonstrate throughout the article.
The Leverage Inherent in Options
When you buy an
option, you hope that
the stock will move
in your predicted
direction, and
quickly enough to
make a profit.
Each option contract gives you the right to buy (a call option) or sell (a
put option) 100 shares of stock at a specific price (the strike price) by
a specific date in time (the expiration
date). When you buy an option, you
hope that the stock will move in
your predicted direction, and quickly
enough to make a profit. The cost of
the option—the option premium—is
far less than the cost of buying 100
shares of stock. For example, it would
cost $6,000 to buy 100 shares of a
stock currently worth $60 a share. If
the option premium for a call option
on this stock is $4, you could buy the
option for only $400. That gives you the right to buy 100 shares of the
stock—but you don’t have to. That $400 gives you control over $6,000
worth of stock. That’s leverage.
You get a different type of leverage when you buy a put. A put option
gives you the right to sell 100 shares of stock, but you don’t have to own
the stock. The put buyer hopes the price of the stock goes down. If it does, the put becomes more valuable and can be sold for a profit
put option) 100 shares of stock at a specific price (the strike price) by
a specific date in time (the expiration
date). When you buy an option, you
hope that the stock will move in
your predicted direction, and quickly
enough to make a profit. The cost of
the option—the option premium—is
far less than the cost of buying 100
shares of stock. For example, it would
cost $6,000 to buy 100 shares of a
stock currently worth $60 a share. If
the option premium for a call option
on this stock is $4, you could buy the
option for only $400. That gives you the right to buy 100 shares of the
stock—but you don’t have to. That $400 gives you control over $6,000
worth of stock. That’s leverage.
You get a different type of leverage when you buy a put. A put option
gives you the right to sell 100 shares of stock, but you don’t have to own
the stock. The put buyer hopes the price of the stock goes down. If it does, the put becomes more valuable and can be sold for a profit
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