Nov
Trading Options vs. Stocks
Trading options is both similar to and different from trading stocks. There are many ways to make money trading stocks from going long to day trading.In this regard,options and stock trading, are similar.
When an options trader is first starting out, he or she needs to understand the basic difference between an option and a stock. An option is merely the right to purchase a particular stock at a specific price over a specific period of time.Since we’re talking about stock prices here, there is volatility in their value over the option expiration interval.
Options, on the other hand, expire on a specific date, so you’ll need to exercise them on or before that date. And you don’t even have to exercise your option if you so choose. And you can purchase a stock for much less than it’s market price by purchasing an option.Options traders can leverage their trades.They can acquire the option to buy a 0 stock for only a fraction of that price.Hence, they can acquire options for more stocks than if they were actually purchasing the stocks outright.This ability to leverage your investment makes options very attrative.
There are several different types of options. “American” options can be exercised any time before their expiration date, while ”European” options can only be exercised on the expiration date itself.And to make matters even more complicated,these different types of options are not determined by “where” you purchase them.The “American” options tend to apply to stocks and bonds, while the “European” type applies more often to indexes. And most options expire the Saturday after the third Friday each month. But U.S. markets are closed on weekends, so “American” options expire on the third Friday of the month and ”European” options the following day.
An option is a contract that gives you the right to sell (a put option)a stock or buy (a call option) a stock on or before its expiration date.There are several strategic choices when you purchase an option. You can exercise it any time either before or on the expiration date.Or you decide not to exercise it and try to sell the option before the expiration date and recoup a portion of your investment. If you don’t exercise the option before it expires, you lose your investment.Let’s look at these situations more closely:
Let’s say you buy an option for Acme Chemicals Corp.for a share with a strike price of . Now most options contracts require a minimum purchase of 100 shares, so you’d have to pay 0 (for 100 shares) for the contract.Acme’s stock price rises to two weeks later and rather than waiting for the expiration date, you decide to take your profit and run. You exercise your option and buy the stock for , then you turn around and and sell right away it for .After you deduct the acquisition cost per share, you’re left with a profit, or 0 less brokerage commissions.That’s a conservative strategy, but a profitable one.And that’s good!
But consider the opposite scenario. And happens if Acme’s stock price goes down. What happens if the price of the stock falls below ? If you sold your options for half of what they cost you, in this example,you’d only be out 0. Bear in mind that owning an option does not require you to purchase the stock. In this case, you can sell your option and recoup a portion of your investment. This is better than acquiring 100 shares of Acme’s stock outright. You could exercise your option as soon as you can realize a profit or you could wait it out and try for a bigger profit any time before the expiration date. My personal recommendation is to take the conservative approach and you’ll more likely see consistently positive returns, but most likely not any big killings. But that’s just my personal investment strategy. Higher risk, higher returns. Greater profits. And, of course,potentially larger losses.And just like most other investments.
This is just a basic example of how options trading works. It is more complicated than this and you should really educate yourself before you commit much of your capital to it. The best options trading trading tutorial I know is the one taught by David Vallieres, which you can review here and the video above from the free demo video series he provides. This course is the best in my opinion because Mr. Vallieres not only teaches you the basics but also shares with you his money making guidance.
