4 Things You Need to Know About Options Trading Today

In today’s volatile world of securities, options trading is a great way to invest your money. If you’re interested in the ever-changing environment of the 21st century’s market exchange, then keep reading. You’ll learn the top four things that everyone should know about options trading.

Start with the Basics

Image via Flickr by QuoteInspector

It’s best to start with options trading basics whenever you’re in unfamiliar territory. Options trading may sound complicated, but it’s based on a simple premise. You, the investor, have the option — but are not obligated — to buy or sell an underlying asset, for a set price, before a specific date. Sounds easy right? 

Well, it can get a little confusing because trading options are different than trading stocks. Knowing the basics will help you develop strategies, and earn higher returns on your investments.

Call Options

When you consider a call option, think of it as a down-payment or a contract to buy. It carries a premium and works much like a non-refundable down-payment you might make on a house. It’s the option to purchase an asset at a later date.

In this example, a couple of years go by, and you can choose to buy the house for the agreed upon price, or you let it go, thereby forfeiting your option’s premium. 

But remember, you locked in the cost of the options contract in the beginning. That means you’ll pay only that rate regardless of the current market price, even if it’s more. That’s how you cash in big.

Put Options

While the call option is like a down payment, the put option works like insurance. If you, the investor, want to insure your portfolio, you would purchase put options. This gives you the right to sell for no less than the option. 

Let’s say a bear or declining market is on the horizon, and you’re not willing to lose more than 10 percent of your long-term position. Don’t worry. You can buy a put option that gives you the right to sell the index at no less than a 10 percent loss, in this example, over a specific timeframe. 

This is a handy option to have because if the market crashes, you can sell the index for the put option, even if it’s trading for less. There is a premium for buying the option, and the downside is you’ll lose it if the market doesn’t drop during its stretch.

Options Trading Strategies

Volatility has seized this year’s marketplace, and many options trades are paying out big. When you’re hunting around for investing ideas, look for stocks that tend to make outsized moves on the charts. 

Then, single out large-cap companies that trade a minimum of one million shares a day that also have high expected earnings within the next week or two. Those options are usually a boon for novice buyers. 

Options trading requires planning and a sound strategy, yet this method can consistently increase your returns. Put the odds in your favor with options trading.

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