Learn More About Options Trading
Options can be combined in multiple ways creating all sort of options strategies which can be very conservative, less moderate or something in between. Traders who believe the market is headed up can buy calls which allow them to buy a stock at a specific price, no matter how high the price may actually climb. Puts are for people who think the market is headed down; if they are correct, no matter how low a stock goes, they can sell it at the strike price according to the contract.
Options can also be used to offset potential losses. For example, traders who own a stock and think its value might go down, can offset some of its risk by selling a call option at today’s price. What they earn by writing the option partially offsets any potential loss on the trade if they are wrong. Additionally, if a trader wants to buy a stock but feel it is overvalued at today’s price, they can effectively lower the price by selling a put which commits them to buy if it reaches their desired price. They make money from the put, whether or not they end up owning the stock.
Because the value of options is tied to price movement over a given period of time, options are far more volatile than stocks and price changes are dramatic; a $100 stock that goes to $110 has seen a 10% increase, but this might translate to a 100% increase in an option that allows you to buy at $100 anytime in the next six months. It’s not unreasonable that traders ask themselves, “Why should I spend $100 to buy a stock when I can control it with a $5 or $10 option?”