There are many different ways to make money trading options.
Options are one of the most versatile financial instruments, and they can be used by nearly any investor to complement his investing strategy and goals.
Let's look at some of the ways you can trade options to make money.
1.
Buying Calls When you buy a call, you are betting that the market will rise in the short term.
You can usually buy the option to buy a stock at a fraction of the price that you would need to invest in order to buy the full stock.
This gives you the opportunity to experience massive profits if the stock rises, but you also run the risk of losing much of your money if the stock stays the same or drops in price.
2.
Selling Calls It is also possible to make money by selling calls.
When you sell a call, you are paid a small premium in exchange for assuming the obligation to sell a stock if it reaches a certain price.
If you own the underlying stock, this is known as covered call writing.
If you don't own the underlying stock, this is known as naked call writing.
Generally, a call writer (seller) hopes that the stock will remain the same or sink in price before the expiry date so that he can keep the premium.
3.
Buying Puts Often, puts are used as insurance by someone who holds the underlying stock.
A put allows them to sell their stock at a guaranteed price if it sinks.
However, you can also buy puts even if you don't own the stock.
If you buy a put on a stock which guarantees you the right to sell a stock at $80, and the stock sinks to $60, then you can buy the stock on the market and exercise your option, thus earning an instant $20 per share profit.
4.
Selling Puts It takes two people to complete a put contract, and the seller can definitely make some money as well.
Selling puts is a bit like selling insurance.
You collect a small premium, and if the stock drops below a certain price, you guarantee that you will buy it at a previously agreed upon price.
Many stock investors will say that selling puts is one of the riskiest option strategies available because your profit potential is limited to the premium you collect, while you can lose a ton of money if the stock falls to zero.
Other investors, such as Warren Buffett, exclusively sell puts.
They sell puts on stocks they would like to buy, but don't because the price is currently too high.
Buffett only sells puts on good companies, so he knows there is little chance that it will fall to zero.
Options are one of the most versatile financial instruments, and they can be used by nearly any investor to complement his investing strategy and goals.
Let's look at some of the ways you can trade options to make money.
1.
Buying Calls When you buy a call, you are betting that the market will rise in the short term.
You can usually buy the option to buy a stock at a fraction of the price that you would need to invest in order to buy the full stock.
This gives you the opportunity to experience massive profits if the stock rises, but you also run the risk of losing much of your money if the stock stays the same or drops in price.
2.
Selling Calls It is also possible to make money by selling calls.
When you sell a call, you are paid a small premium in exchange for assuming the obligation to sell a stock if it reaches a certain price.
If you own the underlying stock, this is known as covered call writing.
If you don't own the underlying stock, this is known as naked call writing.
Generally, a call writer (seller) hopes that the stock will remain the same or sink in price before the expiry date so that he can keep the premium.
3.
Buying Puts Often, puts are used as insurance by someone who holds the underlying stock.
A put allows them to sell their stock at a guaranteed price if it sinks.
However, you can also buy puts even if you don't own the stock.
If you buy a put on a stock which guarantees you the right to sell a stock at $80, and the stock sinks to $60, then you can buy the stock on the market and exercise your option, thus earning an instant $20 per share profit.
4.
Selling Puts It takes two people to complete a put contract, and the seller can definitely make some money as well.
Selling puts is a bit like selling insurance.
You collect a small premium, and if the stock drops below a certain price, you guarantee that you will buy it at a previously agreed upon price.
Many stock investors will say that selling puts is one of the riskiest option strategies available because your profit potential is limited to the premium you collect, while you can lose a ton of money if the stock falls to zero.
Other investors, such as Warren Buffett, exclusively sell puts.
They sell puts on stocks they would like to buy, but don't because the price is currently too high.
Buffett only sells puts on good companies, so he knows there is little chance that it will fall to zero.