June 14, 0 Comments. You can actually take advantage of trading stock options — or a financial instrument that gives you the right to purchase or sell an asset at a future date. Stock options have values just like stocks, but otherwise have differences that make them unique.
Learning how to trade stock options gives traders leverage while reducing risk. As I covered above, a stock option is the right to buy or sell a stock at some point in the future. This future reference price is called the strike.
This is called a call option — the right but not the obligation to buy a stock. What happens with this contract? So to make that deal worthwhile for the other person, you pay what is called a premium , or a price per share. When you want to sell an option, you create what is called a put option — or a promise to sell the stock at a future date for a future price.
There are several key benefits to trading options that make them attractive to traders versus buying stock itself. All other things considered equal, there is less risk with options than stocks, at least in terms of your exposure to losses.
Stock options also gives you leverage , or the ability to buy more with what money you have. Small changes in stock price can result in big gains, unlike with stocks. Another benefit is that you can trade the market before events actually happen. This is a proactive trading method rather than a reactive one. Using options to hedge against these kinds of disappointing outcomes if you have open stock positions is another benefit related to the one above. You could buy stock expecting to benefit in a surge in price, but you could also pay a much smaller amount to buy options against your current position just in case you lose the stock battle and your stock falls.
How Do Stock Options Work? What Are Stock Options? What You Need to Know. Tips for Following the Stock Market. Be the first to leave a reply! Leave a Reply Click here to cancel reply. I'm Karl and I have been a keen investor for over a decade.
Learn more about my experiences and say hello!More...