Can I Make Money Trading Options – In this section, we’ll explore three options strategies that investors often focus on, depending on their portfolio needs and what they think will happen at a given stock price.
Options contracts have a limited duration, usually trading in short periods such as 30, 60 or 90 days, so keep in mind that your strategy may have a short period of time to work.
Can I Make Money Trading Options
Let’s decode the call option example. When you search for a call option on a stock, you might see something like this:
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Let’s say ABC Company is trading at $10 per share. You believe that the price of the stock will rise in the short term, but there is no need to buy the stock. You can buy a call option. Typically, options cost a fraction of the price of the actual stock.
You decide to buy a call option contract on ABC with a strike price of $10 that expires in 90 days. (1 option contract = 100 ABC shares)
A call option costs $2 (also known as a premium) for one contract. This means you paid $200 ($2 premium x 1 contract x 100 shares). You now have the right to buy 100 shares of ABC at $10 until the option contract expires – regardless of the actual share price.
Let’s decode the put option protection strategy. If you want to buy a put option to protect a stock you own, you might see something like this:
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Let’s say ABC Company is trading at $10 per share. You believe that the share price will fall in the short term. You have shares but don’t want to sell them. You can buy a kit option, also called a protection kit.
You decide to buy a put option contract on ABC with a strike price of $10 that expires in 90 days. (1 option contract = 100 ABC shares)
A put option costs $2 (also known as a premium) for one contract. This means you paid $200 ($2 premium x 1 contract x 100 shares). You now have the right to sell 100 shares of ABC at $10 when the option contract expires – regardless of the actual share price.
Let’s decrypt the covert calls. When looking for a call option to sell to generate income on a stock you own, you might see something like this:
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Let’s say ABC stock is selling for $9 per share. You don’t think the price will move much in the near future, but you want to make money from it. You can sell (write) a covered call option.
You decide to sell a call option contract on Company ABC with a strike price of $10 that expires in 90 days. (1 option contract = 100 ABC shares)
The call premium is $2 per contract, so you collect $200 for the sale ($2 premium x 1 contract x 100 shares). In return, if the buyer exercises the contract at any time until the contract expires, you are obligated to sell 100 shares of ABC for $10 – regardless of the actual share price.
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Inspired Investor brings you personal stories, timely information and expert insights to help you make your investment decisions. Visit about us to learn more. Options are a form of derivative contract that gives contract buyers (option holders) the right (but not the obligation) to buy or sell a security at a chosen price in the future. Buyers of options are charged an amount called the seller’s premium for this right. If market prices are not favorable to option holders, they will allow the option to lapse and not exercise this right to ensure that potential losses do not exceed the premium. On the other hand, if the market moves in a direction that makes the right higher, it is exercised.
Options are generally divided into “call” and “put” contracts. With a call option, the buyer of the contract buys the right to
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The underlying asset in the future at a predetermined price, called the strike price or strike price. With the right option, the buyer acquires the right to
Let’s look at some basic strategies that a new investor can use when buying or selling to limit their risk. The first two involve using the option to place a directional bet with limited downside if the bet goes wrong. Others include hedging strategies that are placed on top of existing positions.
Options trading has several advantages for those who want to make targeted bets on the market. If you think the price of the asset will rise, you can buy the call option with less capital than the asset itself. At the same time, if the stock price falls, your losses are limited to the premium paid for the options and nothing more. This can be a preferred strategy for traders who:
Options are essentially leveraged instruments as they allow traders to increase potential leveraged profits by using a smaller amount than would be required if trading the underlying asset itself. So instead of investing $10,000 to buy 100 shares worth $100, you could hypothetically spend, say, $2,000 on a call contract with a strike price 10% above the current market price.
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Let’s say a trader wants to invest $5,000 in Apple (AAPL) at about $165 per share. With this amount, they can buy 30 shares for $4,950. Let’s say the stock price rises 10% to $181.50 in the next month. Excluding any brokerage or transaction fees, the trader’s portfolio grows to $5,445, giving the trader a net dollar return of $495, or 10% of invested capital.
Now let’s say a call option on a stock with a strike price of $165 that expires in about a month is worth $5.50 per share or $550 per contract. Based on the trader’s available investment budget, he can buy nine options for a total of $4950. Since the option contract controls 100 shares, the trader is effectively entering into a trade of 900 shares. If the stock price rises 10% to $181.50 at expiration, the option expires in the money (ITM) and is worth $16.50 per share (for a $181.50 to $165 strike) or $14,850 for 900 shares. That’s an average dollar of $9,990 or 200% of invested capital, a much higher return compared to selling the underlying asset directly.
A trader’s potential loss from a long call is limited to the premium paid. The potential profit is unlimited because the option fee increases with the price of the underlying asset until expiration and in theory there is no limit to how high it can go.
While a call option gives the holder the right to buy the underlying instrument at a specified price before the contract expires, a put option gives the holder the right to
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A put option actually moves in exactly the opposite direction to a call option, so the put option gains value when the price of the underlying instrument falls. Although short selling also allows the trader to profit from falling prices, the risk of a short position is unlimited because there is theoretically no limit to how high the price can go. With a put option, if the underlying expires higher than the strike price of the option, the option expires worthless.
Let’s say you think the stock price is likely to drop from $60 to $50 or less based on poor earnings, but you don’t want to risk selling the stock short if you’re wrong. Instead, you can buy $50 at a $2.00 premium. If the stock does not fall below $50 or if it rises, you will lose no more than $2.00 in premium.
However, if you are right