Option trading is one of the most intrinsically strategic aspects of investing. Given that there are several different types of options and different factors to take into consideration when buying or selling, the entire subject can be quite complicated. However, the different positions available mean that intelligent decisions are rewarded with gains that can be quite lucrative.
The first step to learning to make money in options trading is to understand the basics of it. While attending atrading seminar is the most efficient way to learn the more in-depth aspects, learning the basics is a good place to start – what follows is an overview of those basics.
Calls and Puts
Although there are numerous types of options available in the derivatives market, the two most basic forms are referred to as calls and puts. In either case, the option is sold as though it itself is an asset, and gives the holder a choice to make a particular transaction. Calls give the owner the option to buy an asset at a particular price. Usually the asset is a particular stock or bond, but it can also apply to fixed assets as well.
Puts, conversely, give the holder of the derivative the opportunity to sell an asset at a particular price. The assets remain the same, typically being stocks or bonds. Both calls and puts include expiration date, meaning the holder of the option needs to decide whether to exercise it before a certain date.
Making Money Buying Calls
The most obvious way to make money through options is to buy call options. The advantage of a call option is easy to illustrate: Suppose that a particular one gives the holder the option to purchase shares in a company for 20 dollars. If the price of the stock climbs above that figure before the option’s expiration date, the holder gets to cash in simply by exercising the option to purchase.
Of course, there are several variables to take into consideration in a scenario such as this. The initial cost of the option and the likelihood that the stock’s price will accelerate beyond the option’s price point are both critical considerations to keep in mind. It’s necessary to have a firm grasp on the markets to be able to evaluate whether even buying the call option is a smart move.
Making Money Through Put Options
Put options are a little more complex to understand. While calls entitle their holder to buy an asset at a given price, put options give their holder the option to sell at a given price. This distinction makes put options more akin to taking a short position on an asset. An investor purchasing a put option is going to hope that the asset tied to it will decrease before the option’s expiration date hits.
In many instances, buyers of put options will purchase for assets they already own as a means of protecting themselves from anticipated devaluation. This gives the option holder a longer window of time to evaluate an asset’s performance. If the asset continues to fall in value, they can sell and take…