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A Beginner’s Guide to Options Trading

25 January 2020 No Comment

For many years options trading was typically left to the finance pros. Lately, many individual traders have been breaking into the options trading market. There are a lot of excellent benefits to trading options. If you are looking to diversify your portfolio, looking into options may be a great direction for you to go.

What Are Options?

Options, simply put, are contracts that grant you the rights to purchase or sell a particular stock, share, or asset. The options contract is set within a time frame in which you can invest or sell these options for a fixed price. Buying options lets you watch how that share does in the marketplace before you decide to put all your money into it.

When it comes to purchasing options, you have two types to choose from. The first is a call option. This contract gives you the right to buy shares at the set price, known as the strike price until the expiration date of the agreement. If that stock goes up in value, you can still purchase shares at that set price.

The next option you have is a put option. This is when your contract grants you the rights to sell shares at a set strike price until a set expiration date. So when predicting the market, if you feel the value may drop, you have the option to sell your shares off before the expiration date for the strike price.

How to Buy and Sell Options

When you purchase an options contract, you pay what is called a premium. One benefit of options is that the premium for an option contract tends to be a smaller investment in comparison to purchasing the actual stocks.

Based on your predictions of where you see a company going in the future, you can purchase and trade the call and put options. This allows you to profit from a business failure. If you think a particular stock may go down in price, you can purchase put options and trade those options to investors trying to get out of that stock.

Call options are an excellent investment if you think a stock value is bound to increase. You can buy your call options, and when the price of the stock goes up, you can purchase shares at the set strike price for your call option contract. Then sell these stocks at the current market value.

Why Options Are a Good Choice

Options offer a great way to diversify your portfolio. While they have been known to be better suited for professionals, many individual investors are beginning to take on the learning curve and take advantage of this substantial investment opportunity.

Options provide an opportunity to bring large returns on your investment. When adequately executed, options can save you from a significant loss of investment by purchasing the options to buy, not buying the actual stocks.

If options trading sounds like something you would like to add to your investment portfolio, it’s essential to learn all you can about the best stocks for options trading. Raging bull is a great online source for all the information you need to know about financial trading.

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