Options trading is a little bit, but not much, more complicated than stock trading. This is because of the time decay nature of options: They are wasting assets that lose value as time passes. However, they are also leveraged investments and hold potential for significant gains (and losses) in a short period of time. Like most tools, if used correctly they can be your friend.
There are two kinds of options: calls and puts. In both cases they have a 'strike price' and an 'expiration date'. But a call option represents the right to buy stock, while a put option represents the right to sell stock. In both cases the buyer has the right, but not the obligation, to exercise his or her option. Likewise, the seller of the option has the obligation, but not the right, to deliver (in the case of calls) or receive (in the case of puts) stock if it is above (calls) or below (puts) the strike price.
Typical uses for options include: portfolio protection (puts), speculation (calls or puts), and income (selling options to capture decaying time premium). If you own stock and purchase a put option you are guaranteed to receive at least the strike price for your stock (until the option expires); it's kind of like insurance. By purchasing calls you can bet on a rapid rise in the stock. Or, by selling calls you capture time premium decay each day.
Options are different than stocks in the sense that for every dollar someone makes in options, some other person loses a dollar. It is possible to make money as a buyer or a seller of options if you are correct on timing and direction. However, the fact that most options held until maturity expire worthless tips the scales in favor of the sellers over the long term.
The most popular option-based strategy is called "covered call". In fact, Charles Schwab has stated that 84% of their option enabled accounts will trade covered calls. For every 100 shares of stock you own you can sell 1 call option and receive premium (money) today. If the stock finishes below the strike price by expiration day then you keep that money (and your stock) and can sell another call for the following cycle. If the stock finishes above the strike price then you have a choice: either buy the option back (if you want to keep the stock), or let it get called away and receive the strike price per share for your stock.
By selling a call option against stock you own you are putting a cap on your maximum upside in exchange for some downside protection. The call premium you receive is your downside protection, and you keep that money no matter what happens to the stock. In addition, if you set the strike price low enough (below the current market value of the stock) then you have even more downside protection because of the intrinsic value of the option you sold. For these 'in the money' cases it's possible to have a profit even if the underlying stock falls before the expiration date (as long as it doesn't fall below your net debit for the trade).
Covered call investors have modern tools available to them to assist with the most time consuming parts of the strategy. Using a covered call screener to scan all possible investments is a huge time saver. The old way of doing it with a spreadsheet is laborious and seldom yields optimal results. Modern tools will incorporate earnings release dates and ex-dividend dates so that you get a complete picture of all possible trades.
There are two kinds of options: calls and puts. In both cases they have a 'strike price' and an 'expiration date'. But a call option represents the right to buy stock, while a put option represents the right to sell stock. In both cases the buyer has the right, but not the obligation, to exercise his or her option. Likewise, the seller of the option has the obligation, but not the right, to deliver (in the case of calls) or receive (in the case of puts) stock if it is above (calls) or below (puts) the strike price.
Typical uses for options include: portfolio protection (puts), speculation (calls or puts), and income (selling options to capture decaying time premium). If you own stock and purchase a put option you are guaranteed to receive at least the strike price for your stock (until the option expires); it's kind of like insurance. By purchasing calls you can bet on a rapid rise in the stock. Or, by selling calls you capture time premium decay each day.
Options are different than stocks in the sense that for every dollar someone makes in options, some other person loses a dollar. It is possible to make money as a buyer or a seller of options if you are correct on timing and direction. However, the fact that most options held until maturity expire worthless tips the scales in favor of the sellers over the long term.
The most popular option-based strategy is called "covered call". In fact, Charles Schwab has stated that 84% of their option enabled accounts will trade covered calls. For every 100 shares of stock you own you can sell 1 call option and receive premium (money) today. If the stock finishes below the strike price by expiration day then you keep that money (and your stock) and can sell another call for the following cycle. If the stock finishes above the strike price then you have a choice: either buy the option back (if you want to keep the stock), or let it get called away and receive the strike price per share for your stock.
By selling a call option against stock you own you are putting a cap on your maximum upside in exchange for some downside protection. The call premium you receive is your downside protection, and you keep that money no matter what happens to the stock. In addition, if you set the strike price low enough (below the current market value of the stock) then you have even more downside protection because of the intrinsic value of the option you sold. For these 'in the money' cases it's possible to have a profit even if the underlying stock falls before the expiration date (as long as it doesn't fall below your net debit for the trade).
Covered call investors have modern tools available to them to assist with the most time consuming parts of the strategy. Using a covered call screener to scan all possible investments is a huge time saver. The old way of doing it with a spreadsheet is laborious and seldom yields optimal results. Modern tools will incorporate earnings release dates and ex-dividend dates so that you get a complete picture of all possible trades.
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