However, options can also be used as a strategy for protecting your investments. For example, you could purchase a put option to sell your shares of a stock if you are worried that the price might drop suddenly. This method of using options is somewhat safe, as you only stand to lose the contract price. [2] X Research source
A “call” is the option or right, but not the obligation, to buy an asset at a certain price within a specific period of time. The purchaser of a call expects the price of the underlying stock to rise during the term of the option. For example, the buyer purchases a call on a stock with a $100 strike. The buyer is predicting that the stock will increase (let’s say to $105 per share), but he will be able to buy those stocks for $100. If he wishes, he can turn around and sell those stocks for $105, making a profit. Otherwise the buyer would loose the cost of the call bid. A “put” is the option or right, but not the obligation, to sell an asset at a certain price within a specific period of time. The purchaser of a put expects the price of the underlying stock to fall during the term of the option. In this case, the buyer can force the writer (seller) of the put option contract to buy the asset at the preset rate. You can open a position with the purchase or sale of a call or put, close it by taking the contrary action, exercise it, or let it expire.
A “holder” is someone who has bought an option. A “writer” is someone who has sold an option. A “strike price” is the price at which the asset will be bought or sold (depending on whether it’s a call or a put). This is the price a stock price must go above (for calls) or go below (for puts) before an option can turn a profit. The “expiration date” is the agreed upon date by which the owner of the option must exercise his right to buy or sell the underlying security. After this date is reached, the option expires and the holder loses his right. “In the money” is a phrase used to indicate that the market price of the asset is higher than the strike price (if it’s a call) or lower than the strike price (if it’s a put). “Out of the money” is a phrase used to indicate that the market price of the asset is lower than the strike price (if it’s a call) or higher than the strike price (if it’s a put).
Compare commissions on options trading between various brokerages. Some firms even offer no commissions on options trading. Do some online research and read reviews of the brokerage companies that are on your short list. Learn from other people’s mistakes so that you don’t have to repeat them. Watch out for scam trading sites and platforms. Always research a platform thoroughly before depositing any money. Avoid platforms with negative reviews or reported fraudulent activity. A cash account will only allow purchases of options to open a position. If you want to sell an option to open an account without having the underlying asset, you need a margin account. If you decide to trade online ensure that your online brokerage accepts safe forms of payment such as a secure credit card payment gateway, or a third party payment system such as skrill, PayPal, payoneer, bitcoin, etc.
Covered call writing involved selling the right to buy your stock at a strike price during the option term. The buyer has the right, not the seller. The stock has to be in the brokerage account and cannot be sold or transferred while the call is outstanding. [4] X Research source
Learn about support and resistance levels. These are points at which the stock rarely falls below (support) or rises above (resistance). Support is the level at which significant purchase of the security have occurred historically. Resistance is the price level where significant sales of the security have occurred in the past. [6] X Research source Understand the importance of volume. When a stock is moving in a particular direction with a lot of volume behind it, that typically signifies a strong trend and may be a money-making opportunity. Understand chart patterns. History tends to repeat itself, even with stock prices. There are specific patterns that you should look for in stock price movement that may signify where the price is headed. Learn about moving averages. It’s often the case that when a stock price crosses above or below a specific moving average of previous prices. A 30-day moving average is considered more reliable than a 10-day moving average.
Paper trading is not the same as real trading since there is no psychological pressure or commissions involved. It is a good way to learn mechanics, but not a predictor of real results. Actual options trading is very high risk and can lead to large losses for the trader. Only trade with money you can afford to lose.
One such strategy is the “straddle,” which involves trading both sides of the market, buying a put and call option with both the same strike price and maturity date, so that you limit your exposure. [8] X Research source This strategy is most effective when the market is moving up and down, rather than single direction. It also runs the risk that only a single side will be exercisable. A similar strategy is the “strip,” which is like the straddle, but is a “bearish” strategy with double the earning power on a downward price movement. It is similar to the straddle in its execution, but with twice as many options bought on the downside (put options). [9] X Research source
Delta - the amount an option price moves relative to the price movement of the underlying asset. An option with a delta of . 5 will have an movement of half that of the underlying asset. If the stock moves $1. 00, the option price will move $0. 50. Gamma - the rate that delta will change based on a $1 change in the stock price. Theta - the so-called “time decay” of the option price. It measures how much the price deteriorates as the option gets closer to expiration. Vega - the amount the option price will change based on the volatility of the underlying asset.
