No matter what your investment goals may be, options can help you reach them. And you don't have to become a day trader to learn how options trading works.
It's actually quite simple. An options contract gives the holder the right, but not the obligation, to buy or sell a specific amount of an underlying stock for a specific price and by a specific date.
When you buy an options contract, you do not buy the underlying stock. But that does not mean you won't profit if the underlying stock moves in price.
There are two types of options: put options and call options. Holding a call option gives you the right to buy shares of stock, while holding a put option gives you the right to sell shares.
They both work the same way. The only difference is your opinion on whether the underlying stock will rise or fall in price.
Let's stick with calls right now, for simplicity.
How Call Options Work
If you think a stock will rise in the near future, you might buy 100 shares. If the stock trades at $40 per share, it will cost you $4,000. If the stock is priced at $1,000 per share, where many big tech stocks are priced today, then 100 shares will cost you $100,000. Not many people have that kind of cash lying around.
However, if you buy a call option on that $40 stock, it might cost you $3 for that option, or a total dollar amount of $300 for the underlying 100 shares. That significantly lowers the risk of investing in 100 shares of any stock.
Depending on the option you choose, each $1 increase in the price of the stock might give you a $0.25 profit in the option. It might not sound like much, but on a percentage basis, a $1 gain on a $40 stock is 2.5%. Compare that to a $0.25 gain on a $3 option for an 8.3% gain.
That's more than triple the return on just buying the stock. But that's just one of many options trading strategies to pursue...
How Put Options Work
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Another strategy for options trading can be used to protect your portfolio. In this case, you are more interested in hedging against a market decline instead of making money on the option outright.
For hedging, you might buy a put option on a stock you already own. Let's say it costs you $3 per option on that $40 stock. If the stock falls by $1, your put option might gain $0.25 to partially offset the loss on your stock.
But you could even buy a put option that offers more protection. It is possible to offset any loss on your stock dollar for dollar with an option. Think of it as an insurance policy for your portfolio.
Options traders look at many different strategies, but you don't have to be that fancy. Simple options trades cost relatively little but can increase your returns, protect you from losses, and even provide income. You can speculate on a stock even if you do not know which way it will move after an upcoming news event or earnings release. Or you can make money on a stock that does not move at all.
Don't forget, just because options have a limited shelf life, it does not mean you have to hold them until they expire. You can buy and sell them before they expire, similar to buying and selling regular shares of stock.
Options can be as complex - or as simple - as you make them. Every investor can benefit from learning about how they really do fit in with both conservative and aggressive portfolios.
You Can Collect Four Separate Paydays in Under a Minute with This Options Trading Secret
Live on camera, America's No. 1 Pattern Trader is showing you the secret behind some of his biggest trades to date.
Watch as he uses this special tool to collect four separate paydays in under a minute - all from enormous companies like Netflix, Apple, Facebook, even Amazon.
While it may have taken Tom years to invent this moneymaking "machine," it's super easy to understand and utilize.
All it takes is a few simple mouse clicks, and you could be hundreds, even thousands, richer.
This is an opportunity you won't want to miss out on.