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What to Know Before Options Trading

Trading

The stock market has been credited as one of the most important wealth-building tools available. Investing, whether it be in a brokerage account, an IRA, or an employer-sponsored plan, is a way to let your money work for you and grow over time. You can’t just throw money into a random stock and expect it to be a winner, however. The key to utilizing the market to your advantage all lies in employing the right strategy. Stocks and bonds aren’t the only investment products that can help you achieve your monetary objectives. In fact, many traders and buy-and-hold investors alike are now using options contracts in a wide variety of tactful ways to grow their accounts and achieve their financial goals.

What is Options Trading

Options, or more specifically, options contracts, are investment products that can be used in a variety of ways to potentially make money in the market. Before you can jump in and start using options trading strategies, however, it’s important to understand the basics.

There are two types of options contract: puts and calls. Each contract has a buyer (also called a “holder””) and a seller (also referred to as a “writer”). A call is a contract that allows the buyer the ability to purchase a stock at a specific price (called the strike price) up to a certain date (the expiration date). A put is a contract that allows the buyer to sell a stock at a specified price up to a certain date. The buyer of a contract is never forced to take action, they just have the ability to use, or exercise, their contracts should they choose, from the time that they purchase the contract up until the expiration of the contract. The seller of a contract, however, could potentially be forced into action should the purchasing party choose to exercise.

Options can be used one at a time, or multiple options can be used together in multi-leg strategies. Buying and selling options requires various amounts of risk. The buyer of a call or put is only risking the premium that they paid for a contract, while the risk that a seller of a contract takes on can be unlimited depending on the strategy used. It is important to fully consider the risk to your account before buying or selling any options .

Benefits of Options Trading

There are many reasons why someone would want to buy or sell options contracts. Options trading strategies and monetary outcomes can vary substantially depending on the objective of the investor. Options can be more versatile than other investment products because they can be Some of the most common benefits of using options are income generation, speculation, and protection of a position that you currently hold. Options also allow you to take advantage of stock movement (or lack of movement, depending on the strategy) without having to use up a lot of capital as if you purchased the stock outright.

How To Make Money Trading Options

There are many ways to profit by utilizing options, but they all require having a clear and well thought-out strategy. If you are someone who currently has a portfolio of highly-appreciated, stable stocks, selling covered calls is a strategy that could help generate some extra income. If you are someone who doesn’t have a lot of expendable capital, but you want to make a bullish move on a stock you a speculating about, you could purchase a slightly out of the money call a few months out and, if the stock goes up past the strike price of the contract, you could sell the contract at a premium or decide to exercise the option. These are just a few strategies, as the possibilities with options are vast.

Options can be a great way to build up the value of your portfolio and earn a profit. It is imperative, however, to thoroughly research and understand options trading strategies before you begin, so you don’t make a costly error that cannot be reversed! Whether you are bullish, bearish, expecting volatility, or expecting little market movement, there is a is an options strategy that will fit your needs.

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