If you have experience trading stocks, then you may be ready for the next step in your investment education. Trading options is a great way for the stock investor to make even more money in the stock market. An option is a contract between buyer and seller to sell a certain stock at a specified price before an expiration date.
Call. Put. Double. No, we’re not playing poker here. Did you recognize these terms as trading options? Buying an option to purchase securities is called a call option; an option to sell securities is known as a put option. Purchasing both calls and puts for the same stock, with agreed prices by an agreed date, is referred to as a double option.
If you are new to trading options, then you will find that the hardest part is understanding all of the technical terms involved. But behind all the technical jargon is one basic principle, and that is that you must decide which direction the stock price is heading. If you get that right, then you will be able to choose the correct option to make a profit.
Let’s say the macd indicator is telling you that the stock price will rise in the near future. Then the way to make money is to buy a call option on that stock. If the price does go up, then the value of the call option goes up and you can sell it at a profit. If it doesn’t rise, then the option will expire and you will lose that investment. Put options are what you buy if you think that the price will go down soon.
The seller is willing to sell you the option because you are paying him a premium. This represents his profit if the option expires before you exercise it. So you can only lose this amount and no more. That is one advantage of stock options trading. You know going in that you can only lose so much money rather than your entire portfolio. If you want to leverage a small amount of money into a large potential gain, then options trading could be for you.
It is important to remember that you should only begin trading options after you have taken the time to study the ins and outs of the stock market. That way, you will feel confident in your ability to make good decisions under pressure.
If you have experience trading stocks, then you may be ready for trading options. Stock options trading is a great way for the stock investor to make even more money in the stock market. An option is a contract between buyer and seller to sell a certain stock at a specified price before an expiration date. What you really need to know is which way you think the stock price is going to move in the near future. If you suspect that a stock’s price is going to rise through macd indicator, you could then purchase a call option on that stock for instance.
- David Baxwell
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