Have you ever been interested in trading stocks? We’re here to teach you some basics to trading, such as Calls and Puts, to get you into the game.
Learn how to gain leverage in the market while using less of your own capital. Out of all of the terms you’ve probably heard through pop culture, these two don’t make that list. Keep reading to learn the difference!
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Table of Contents
Why Should You Trade Calls and Puts?
Basically, trading Calls and Puts are similar to betting. This may seem a little off putting to some because it’s risky. The gamble is buyers and sellers do not know if the the stock will go up or down.
- Call Option: The options buyer is taking a chance on the stock’s volatility by paying a higher price to have the right to buy shares of an underlying stock at a specific price by the expiration date.
- Put Option: The complete opposite of a call option. Sellers buy the right to sell the stock at a specific price by an expiration date.
Why Trade Options?
- All about leverage. Investing in options instead of the stock itself allows you to use less of your money to access the stock than if you were to buy or sell it outright. You also have a chance of gaining more from your investment in the end.
- If the deal flops. With an option, you lose your premium but that’s it! You don’t have to sell or buy any stock. No trades occur either.
- Investing in the shares normally. If you invested in your stock normally, you would lose your more than just your premium. In fact, you lose money depending on how big the loss is.
- Expiration date makes a difference. When you buy a stock, there is no expiration. When you buy an option, it is only valid until the specified date.
- Selling options. If you decide to sell options calls or puts, you must trades shares of the underlying stock. This is where things become more risky because now the buyer holds the power. So, if you decide to JUST sell options, then you run the risk of losing it all. Diversifying your investments can protect you from losing all your money in options.
Increase Income During Unchanging Markets
Stocks don’t have to change majorly for options to make you money. On some occasions, stock prices don’t change before an options expiration date comes up. This is where the betting comes in.
To help you obtain the benefits of an option in this instance would be to buy an option contract with a strike price equal to the current market price. Options are starting to sound like a good investment, right? They can be as long as you have the proper support.
Call Options: What You Should Know
Buying stock at a specific price is known as buying a call option. Investors do this when they’re feeling optimistic about the stock market and the price of the underlying stock. Now, if the price of the stock does increase, the owner of the option can buy the stock at the strike price and sell it at a higher market price and make a profit.
However, this can only happen if the price of the stock increases before the option expires. Also, you can sell the call option. People tend to do this when they think the price of the stock will decrease. If the price does decrease, then the option owner walks away with the premium, but if the price increases, then the owner loses money.
Put Options: What You Should Know
Investors will purchase a put option when they think the price of a stock will decrease dramatically. This allows them to sell shares of an underlying stock at strike price before the expiration date.
If the market price of the stock does fall, the buyer can use his right to sell the option at a higher price.
More advanced investors will also sell a put option if they think the price of the underlying stock will increase allowing the investor to keep the premium. However, if it decreases, the investor must buy the stock at strike price, making them vulnerable to loss.
How To Make Money With Options
Trading options is different than trading stocks. With stocks, you are trading a certain number of shares. With options, you are buying and selling the right to trade stocks. Trading options are determined by the circumstance of the market.
Similar to other investments, there is no guarantee that you’ll make money off of it. When you trade stocks, it is very one dimensional and you make money depending on whether the price of the stock goes up or down.
Remember, with options you do not own any stocks, only their contracts. You pretty much have to hope that the price of the stock changes in your favor before the expiration date.
How You Can Lose It All Trading Options
If you thought trading stocks was difficult, trading options requires even more knowledge to pursue. Simply put, anyone can just invest in stocks and hope for the best, like a lottery ticket.
However, trading options takes much more attention because you must be knowledgeable in timing, making smart predictions, and how to carry out transactions. Additionally, new options traders will need to know how to read historical charts and be able to determine patterns.
As a beginner, you’re going to definitely want to find a coach to help you. Generally, your coach will be your brokerage firm because you need someone with experience to help you figure out what options trading plan is for you.
Just know that initially, you might experience big losses up front, but that’s why you work with a brokerage firm because they’ve tested many tactics so they’ll know what works and what doesn’t.
To lessen the chance of a big loss, it is best to diversify your trading portfolio. One of the best things you can do as a new options trader is to research what you’re getting yourself into, whether it be a trading platform or the option that you are investing in. Make sure you select a platform that educates you on the basics of options trading.
One of the most important take-aways from this is that trading options is difficult and you must do your research if you want to succeed. Also, having a supportive broker on your side will help you with the basics of options trading.
A good broker will help you by starting you off small, such as buying a call, and building your way up. As you gain more experience with options trading, you’ll know everything that calls and puts have to offer.