In order to buy options you must understand that options are volatile and speculative in nature. There are however trading strategies that you can use that limit your risk and can provide a great way to make a profit. In fact more conservative investors often rely on stock options as a source of income and as protection through hedging when the market declines.
Stock options give you the right but not the obligation to buy or sell shares at a set dollar amount before the expiration date. The set dollar amount is referred to as the strike price. Options are great because you can participate in a stockís price movement without holding the shares, at a fraction of the cost, and with great leverage that allows for sizeable gains.
The optionís value is impacted by how much the stock price moves and how long it takes, as well as the stockís volatility. You may be right on the direction but you may run out of time as you are trading options and it expires. Leverage works both ways.
As you buy options you will learn about call options and put options. As a call option hits a strike price the stock can be called away. On the other hand, with a put option the shares can sold to someone else. Investors consider calls to be bullish and puts to be bearish and the value of puts and calls depends upon the direction that they investor thinks the stock or the market is heading.
Buying options also means understanding the terms in-the-money or out-of-the-money. In-the-money options are more expensive than out-of-the-money options which makes then less desirable to investors who have little capital. It is important to understand however that out-of-the-money options come with higher risk. This higher risk is due to the fact that there is a greater probability that they will end up being worth nothing by their expiration date. Also, there is generally a larger move in the price of the underlying security with out-of-the-money options than with in-the money options.
There is a lot of information to learn about if you want to buy options. There are numerous terms in addition to those we mention above. These terms include but are not limited to bear put spread, bull put spread, and bear call spread and bull call spread. Continue your options trading education and see if this is the best way to invest for you.
Due to travel conflicts, there will not be a market direction or a stock chat today. We apologize for the inconvenience.
The Candlestick Forum Team
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