In the past decade, the popularity of stock options has exploded. Online trading platforms have injected liquidity into the options market and made it easily-accessible to retail traders. But many stock traders and even some options traders may not fully understand what exactly a stock option is. An option is typically a contract to buy or sell shares of a stock at a certain price on a certain future date.
If you anticipate that a stock's share price will rise, you would look for call options to buy with strike prices below your target price. If you predict that a stock's share price will fall, you could potentially profit by buying put options with a strike price above your target price. Options can be a useful way to hedge against core portfolio stock holdings, and they can provide major leverage for short-term trades.
However, they can also be extremely volatile and risky. In addition, unlike stocks, options are not directly tied to a real-world company and have no value if they expire out-of-the money. For traders that understand the risks associated with option trading, options can be a useful and profitable trading tool.
Did you like this article? Could it have been improved? Please email feedback benzinga. Benzinga does not provide investment advice. Membership is Free What are you waiting for? Free Account Login Click here to access your premium account. Contribute Login Sign up. Benzinga - Feed Your Mind. How Do You Trade Options? Wayne Duggan , Benzinga Staff Writer.
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