If you’ve been trading stocks for a while and want to do something a little more speculative, then maybe trading options is for you. At a very basic level, an option traded on the stock exchange means ‘a right’. So an options trade involves giving someone the right to buy or sell a certain stock at a certain price by a specific time.
Call. Put. Double. No, we’re not playing poker here. Did you recognize these terms as trading options? Buying an option to purchase securities is called a call option; an option to sell securities is known as a put option. Purchasing both calls and puts for the same stock, with agreed prices by an agreed date, is referred to as a double option.
If you are new to trading options, then you will find that the hardest part is understanding all of the technical terms involved. But behind all the technical jargon is one basic principle, and that is that you must decide which direction the stock price is heading. If you get that right, then you will be able to choose the correct option to make a profit.
Let’s say the macd indicator is telling you that the stock price will rise in the near future. Then the way to make money is to buy a call option on that stock. If the price does go up, then the value of the call option goes up and you can sell it at a profit. If it doesn’t rise, then the option will expire and you will lose that investment. Put options are what you buy if you think that the price will go down soon.
In both of these instances, you obtain the right — or option — to buy at a set price from paying the premium, or the option money, to the market maker who sells the option. Should the market move against you, the only loss you’ll face is the option money you have already paid. So, the advantage to stock options trading is your losses have a set ceiling. Options are a good strategy for people who can’t risk significant capital amounts but seek larger returns from volatility and want to use a smaller amount of money to gain from price variations.
Make sure that you have done your homework and educated yourself about trading options before you dip your toe into the water, because you will need to know what you are doing before you do it.
If you have experience trading stocks, then you may be ready for the next step in your investment education. Trading options is a great way for the stock investor to make even more money in the stock market. An option is a contract between buyer and seller to sell a certain stock at a specified price before an expiration date. If you suspect that a stock’s price is going to rise through a MACD indicator, you could then purchase a call option on that stock for instance. So the good thing in stock options trading is that your losses always have a known ceiling.
- David Baxwell
This entry was posted on Monday, February 23rd, 2009 at 1:02 am and is filed under Finance. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.
