The Skinny
- Options provide, well, options. They can profit from up moves or down moves, be market neutral, generate income, hedge against risk, produce outsized profits, be conservative or aggressive, and more.
- Options let investors control larger blocks of shares for less money than buying the shares outright.
- Options are contracts that give investors the right – or “option” – to buy or sell an underlying security at a specific price.
- Investors can buy and sell options on multiple securities, including stocks, commodities, stock futures, foreign currencies, and bonds.
- Options are part of a broader investment class called “derivatives” because they derive their value from the underlying assets.
- Options contracts have expiration dates, meaning the holder of the contract must decide to take action before that specified date.
- A stock option contract controls 100 shares of the underlying stock.
- Options accounts can be opened at most leading brokerage firms. Investors new to options can expect a vetting process before being approved to trade options.
Options have long had a mystique about them. Many investors are fascinated by them and the possibilities they offer.
But those same investors also are often confused, afraid, and intimidated by options.
That’s understandable. It takes some work to understand and become more familiar with options. But when used appropriately in the context of an overall investment strategy, they can be worth it.
Options can boost profits, provide hedges, generate income, and more. And while some options trades can become exceedingly complicated (look up the “reverse iron albatross spread,” which involves four separate transactions), they certainly don’t need to be to further your investing goals.
Because options are different and have a reputation for being ultra-high risk, they have not been a mainstay investment vehicle for regular investors. That sentiment is changing as investors build awareness, recognize the benefits of options, and realize there are many ways to use them.
In fact, options are now so widely used that the average number of daily trades on the Chicago Board Options Exchange (CBOE) exceeds the number of daily stock trades on both Nasdaq and the New York Stock Exchange (NYSE).
What’s more, a recent study by Alphacution Research Conservatory shows that 25% of all options trades are now by retail investors. With a record average volume of 39 million options trades per day in 2021, that equates to roughly 9.75 million daily options trades from individuals.
If you are already incorporating options into your investing or thinking of doing so, you clearly aren’t alone.
If you aren’t yet – or if you want to add to your knowledge base before diving in further – individual investors especially should make sure to use options with full knowledge of the risks, rewards, and processes of options trading.
That’s where this InvestorPlace report can help you find your way. Inside these pages, we’ll help you understand what options are, how to trade them, and the risks and rewards involved.
An important note before we begin: Any experienced investor will tell you that options aren’t for everyone, and they’re exactly right. You are smart to want to educate yourself about options, and if in the end you decide they are not for you, that is perfectly fine. There are .
Let’s begin with the surprisingly long history of options.
Rise of the Empowered Investor
Newly empowered investors often use sophisticated tools to executive more complex strategies such as options trading. There is further evidence that a growing portion of newly-empowered investors are becoming more aware and appreciative of market complexities, as well as the interconnectedness between different players in the financial services ecosystem.
Retail investors have changed their trading stripes in recent years, with technology fueling that shift.
But believe it or not, options trading can be traced back not decades or even centuries, but thousands of years – all the way to Ancient Greece.
That’s when the strategy of derivatives trading – investments that create their financial value from another underlying asset – was first put into practice.
As the story goes, the first-known Greek philosopher, Thales of Miletus, executed the first-known options trade. It began when he estimated that the year’s olive crop would be a robust one. He decided to buy up an abundant supply of olive presses that would be needed to manage such a bumper crop.
That is what we call a “pick and shovel” investment strategy today, so called because those who sold picks and shovels to miners during the California Gold Rush made a ton of money but with less volatility than hit-or-miss miners. To this day, investors can do well owning suppliers in big trends – a semiconductor supplier to Apple Inc. (AAPL), for example.
How Thales went about buying the olive presses is where it became an options trade.
At the time, other financiers and olive growers weren’t as confident about the coming year’s crop – or they at least weren’t willing to put any money on it yet. They stayed on the sidelines, so Thales was able to buy olive press contracts cheaply.
The contracts called for an initial down payment that gave Tales the right to buy the olive presses in a specific quantity and at a specific time in the future. If the olive season were a bust, Thales could forego buying the presses and be out just his initial deposit. If the olive season were as robust as he expected, he could exercise his “option” to buy the presses, giving him immense leverage in a high-demand olive market.
Turns out Thales was right about the bumper crop, and there was huge demand for the high-quality olives, just as he had forecasted. Thales exercised his right to buy the presses, charged high prices for the olives, and profited big time as he owned most of the region’s olive presses.
Nearly 2,000 years later, options trading became more famous in the 1600s during the historic Dutch tulip bubble. Yes, hard as it is to believe, a bubble formed in tulip flowers when Dutch bankers and financiers speculated on potential prices. It is known to this day as “tulipmania,” and you often hear about it as a historical parallel when someone thinks an asset bubble is going to burst.
Speculation around tulips was so intense that rare bulbs were going for six years’ worth of the average annual salary. As the bubble built and it seemed like prices would never stop going up, speculators moved in and started using margin (investing on credit) and derivatives, leveraging themselves to buy more than they could afford.
Tulip prices crashed hard after three years of mania. When that bubble burst in 1637 (and as tulip purchase contracts were sold for $25,000 apiece in 17th century dollars), most investors were left with huge losses, giving historians an early example of the significant risks involved in options trading.
Those wounds were self-inflicted by the way speculators used options, and in the next century, further efforts to trade options in London proved more sustainable. This led directly to the U.S. options trading market today, which consists of the Chicago Board Options Exchange (CBOE) and the Options Clearing Corp. (OCC).
The CBOE is the largest U.S. market for trading options.
According to Statista, the CBOE accounts for at least 50% of all options trades executed within the United States on a daily basis.
On average, over $22 billion changes hands in options markets every day.
Fast Fact. The original CBOE was located in the former smoker’s lounge of the Chicago Board of Trade Building.
What Are Options?
Options are actually fairly easy to understand at a theoretical level, though their practical applications can become quite complex.
Options are legal contracts between two parties that give the buyer of the option contract the right to buy or sell a security (known as the underlying asset) to the seller of the contract for a specific price within a specific period of time.
The specific price at which the underlying asset must be bought or sold is known as the “strike price.” The “expiration date” is the day the contract expires, so the holder of the contract must act on or before that date or simply let the agreement expire.
The underlying assets in options trading are typically securities like stocks, exchange-traded funds (ETFs), market indices, commodities, currencies, and bonds. Because options gain their value from their underlying securities, they fall into the class of investments called “derivatives.”
That’s where options differ from stocks. Stocks represent direct ownership (a share) of a publicly traded company, whereas stock options are tradable contracts that control those shares. They allow investors to bet on the movement of the stock, up or down.
Why Trade Options? Pros and Cons
While trading options isn’t for everyone (especially for the risk-averse investor), it can make sense if you’re looking for a way to leverage financial assets, like stocks and commodities, to protect and grow your portfolio. Trading options may also offer value to investors who want to protect investment profits or who seek to curb investment losses without a big cash expenditure.
Let’s clarify things with some real life “pros” and “cons” when trading options.
The Upsides of Options
More bang for the buck. Options provide leverage that enables an investor to control tradable assets with a smaller cash outlay It’s not uncommon for options traders to take a stake in a position for as little as $500 or $1,000, with significant upside potential if the trade goes in the investor’s favor.
An advantageous risk position. Done properly, stock options trading enables traders to take calculated risks that offer higher upside with limited downside.
Strategic flexibility. Options also gives investors access to unique trading strategies that can leverage unique market characteristics, such as volatility and time decay (i.e., the rate of decline that defines an options contract’s value over the passage of time).
The ability to “freeze” a stock price. Anyone who’s bought a big-ticket item like a refrigerator or big-screen television on layaway understands the concept of “freezing” a product or service price over a period of time.
Options trading offers investors a similar perk. By entering into an options contract with fixed price over a fixed period time, an options trader essentially freezes the price of an underling asset (like a stock), guaranteeing that they can either purchase or sell the asset at that fixed price at any time up to and including the expiration date.
The Downsides of Options
Lower liquidity than stocks. Stock options aren’t as “liquid” as common stocks, like Apple, Procter & Gamble Co. (PG), or Walmart Inc. (WMT), which are bought and sold regularly, easily, and efficiently. Apple alone trades nearly 100 million shares every day on average.
That’s by design, as most options contracts come with unique strike prices and unique expiration dates – a variability that makes for a narrower trading channel and lower-volume market for options.
That liquidity problem is limited somewhat by the fact that an options contract’s value is tied to the underlying asset, but speculation can still run rampant.
Bigger trading spreads. Options contracts often have a bigger “spread” than stocks. The spread is the difference between the price the seller is requesting (the “ask” price) and the price the buyer is offering (the “bid”). Inexperienced investors can sometimes get dinged by this spread.
This spread can also be used to an investor’s advantage, and limit orders can be used to make sure you don’t overpay to buy a contract or get less than you want when selling.
Options trading can be complex. No kidding, right? This is probably the one thing every investor knows about options. If they were as simple as buying and selling stocks, everyone would be using them.
The fact is that options trading is more complex than stock trading, and that complexity can continue to scale up. This is why brokerage firms approve accounts, and why it is important to understand the concepts of spreads, risks, expiration dates, strike prices, and other features of options trading.
Options expire. Options are unique among investable assets in that they have an expiration date. Many options expire monthly, with the third Friday of the month as the last day to act on the contract. Some stocks have weekly options, and long-term equity anticipation securities (LEAPS) are contracts that don’t expire for one to three years.
You may lose a lot of money. There’s no doubt about it: Options trading can lead to significant money loss depending on the type of trade, if the market goes against you, and when the contract expires.
Fast Facts: Key Options Trading Terms to Know
Before trading any options, investors should get to know the key terms associated with the options trading market. We can’t go through them all here, but we can cover the terms that should be at the top of the list. For a more complete list, you can check out The Options Industry Council Options Glossary.
American option. This describes an option that may be exercised at any point in the contract up to and including the expiration date.
European option. This type of option can only be exercised in a specific time period right before its expiration date. This can provide less flexibility than an American-style option to capitalize on market conditions.
Long option. This means an investor is the buyer of the option and can decide whether to exercise it before the expiration date.
Short option. This means an investor is selling an option, giving the buyer the right to decide whether to exercise the option.
Expiration date. The date the options contract expires. After the expiration date, the options contract cannot be exercised.
Strike price. This is the price the contract holder has the right, but not the obligation, to buy or sell the option’s underlying security.
In the money. A scenario in which the options contract itself has value. For example, if an investor owns a call option that gives them the right to buy stock ABC at $10 and ABC is currently trading for $15, that option has an intrinsic value of $5. The opposite is true for a put option, which gives the holder the right to sell at a specific price.
At the money. This term, used for both puts and calls, describes a scenario where the stock price is the same as the strike price, thereby giving it no intrinsic value.
Out of the money. When an options investor is “out of the money” on a call option, that means the strike price is higher than the stock price, so there is no point in exercising the option. Using our example above, if an investor owns a call option that gives them the right to buy stock ABC at $10 and it is trading at $8, that option would be out of the money. It would be smarter to buy the stock on the open market for $8 rather than pay the $10 required by the options contract. Once again, the opposite is true on a put option – the stock price exceeds the strike price.
The premium. This is the price of the option over and above the intrinsic value, and it is directly related to how much time until expiration. The longer the time to expiration, the higher the time value. As the options gets closer to expiration, the time value decreases.
If stock ABC is trading at $15 and an investor wants to buy a call option with a strike price of $10 (giving them the right to buy it at $10), the option will cost the $5 intrinsic value plus a time premium given to it by the market. That time premium could be an extra $1 with a couple of weeks until expiration, but if expiration is the next day, the time premium would be almost $0.
Understanding the Two Most Widely Traded Options: Calls and Puts
While there are numerous types of options trades, the two most prominent are calls and puts.
Here’s a snapshot of each and how they work. Keep in mind, though, that options do not have to be held until expiration. The contracts themselves can be traded any time prior to expiration, so many investors do not hold the contract long enough to decide whether to exercise the option or let it expire.
Call Options. Holding a call option means the contract owner has the right to buy the underlying asset at a specific price and within a specific time period.
Investors buy call options if they believe the underlying stock will move higher. If the stock increases in value, the call option will also increase in value. Upon the expiration date, the profit depends on the stock price at that time and the contract’s strike price.
On the other hand, if a stock decreases in value, the call option will lose value. Ultimately, if the stock price is below the strike price at expiration, then the call expires worthless.
Put Options. A put option gives the contract owner the right to sell an underlying asset at a specific price and at a specific time. This type of option is used when an investor expects a stock or asset to decrease in value. It is a way to short an investment by owning options.
Because an option provides the holder with the right but not the obligation, a put option, like a call option, has a payoff structure depending upon the movement of the stock. With put options, as the underlying stock price decreases, the put option will increase in value. Conversely, if the stock increases, the put option falls in value, with the maximum loss to the buyer being the purchase price of the put.
The risks of buying and selling options are typically different for the buyer and the seller.
For the call buyer. If the option expires out of the money – meaning the stock is below the strike price – it expires worthless, and the buyer loses what they paid for the option.
For the call seller. If the option is in the money (stock is above the strike price), the buyer can exercise it. That then requires the seller to deliver the requisite number of shares to the buyer at the contract’s strike price.
For the put buyer. If the option expires out of the money (above the strike price), it expires worthless, and the buyer loses what they paid for the option.
For the put seller. If the option is in the money (below the strike price), the buyer can exercise it. That then requires the seller to buy the stock from the option holder at the contract’s strike price.
Call Options Trading Example
Let’s see how options trade in the real world, starting with a call option trade.
Options contracts control 100 shares of the underlying asset. When you buy a call option, you control the right to buy 100 shares of the stock at the chosen strike price.
For example, if ABC stock is trading at $100, an options investor may be able to buy a $105 call with 30 days to expiration for $2. That would require the investor to pay $200 for one contract of 100 shares.
At the time of purchase, the call would be out of the money because it is currently trading on the open market below the contract’s strike price. If the stock makes a nice move to $120 by expiration, the call option would be worth at least $15 (the amount above the strike price), and the options investor could sell the contract and make $1,300 on the $200 investment:
Sell price ($15 per share) – initial cost ($2 per share) = $13 per share ×100 shares in the contract…
That would be a sweet 550% return.
Maximum profit potential when buying calls is theoretically unlimited, as the stock could keep moving higher. Maximum loss potential is the initial investment – $2 per share, or $200 total – if the stock does not exceed the strike price by the expiration date.
You can also sell call options, which reverses the dynamic. Let’s say you sold instead of bought that same ABC stock $105 call for $2. As long as the stock does not rise above $105 by the expiration of my contract, the seller keeps the shares (assuming they own them to begin with) as well as the $200 that they sold the call option for.
This is income, and you can turn around and sell another call option on the stock to generate more income. Whenever the stock does rise above the strike price, it would be “called away,” and the buyer of the option would pay you the agreed upon price for 100 shares of stock.
If you don’t own the shares and sell a contract, it is referred to as an “uncovered” or “naked” option. In that case, you would either need to purchase the shares to provide them to the buyer, or you would need to sell the options contract before it is exercised.
The key point is that buying call options is a bullish strategy for investors who expect that asset to move higher.
Here’s one more example to illustrate that point.
An options investor buys a call option for $20 premium, giving that investor the right, but not the obligation, to buy 100 shares of XYZ Co. at $160 per share. Shortly after, XYZ’s stock price rises to $200.
In that scenario, the options contract holder has two choices. The investor can sell the contract to unwind the trade, giving them a net profit of at least $20 per share – $40 above the strike price minus the $20 cost of the option. That represents a nice doubling of money when the underlying stock moved 25%.
Or, the holder of the call option could exercise it and buy the shares at $160, a $40 discount to where it is trading on the market. That would require more upfront money, and if the investor immediately sold them again at the $200 market price, they would earn $40 per share, or 25%.
If the price of XYZ stock dips below $160, though, there would be no point in exercising the option and the contract would expire worthless. The buyer would lose the $20 purchase price, or $200 for the contract.
Conversely, the call option seller is betting XYZ’s stock price will either fall or remain at the same pricing level. Let’s say XYZ’s share price rises to $200. In that scenario, the call option seller is contractually obligated to sell 100 shares at $160 to the buyer of the contract. In this case, that would work against the call seller. The other possibility is to try to buy back the option for at least $40, which would mean they are out $4,000 at the end of the trade.
Yet, if XYZ’s stock price slides or remains hovered near the $160 mark and the call options buyer doesn’t exercise the buy call the shares away, the option seller pockets that $20 per share as profit.
Put Options Trading Example
A put option is the opposite of a call option.
A put option enables gives the holder the right, but not the obligation, to sell 100 shares of an underlying stock at the contract’s strike price before the expiration date. With a put option, an investor is betting the price of the underlying stock will decline.
Buying a put option is a bearish strategy because it allows you to sell 100 shares of stock above where you would be able to sell it on the open market, if the stock’s price falls below the strike price.
Let’s say ABC stock is selling for $100 and our investor buys a put option with a $94 strike price for $3 per share – or $300 total cost. This gives the now owner of the put contract the right to sell shares at $94. If ABC falls to $80, that put option would have an intrinsic value of $14 per share. The investor could sell the put, close out the trade, and make $1,100 on a $300 investment, or 367%.
Selling a put is one of the most popular options strategies because it allows the owner to either make money if a stock moves down or ensure a minimum price at which they can sell shares of the stock. Owners of puts generally make money if the stock stays the same or moves higher during the term of the contract.
Again, here’s a second example to help illustrate how put options work. This time, let’s say an investor buys a put option on stock XYZ with a strike price of $160 for $5 per share, or $500. That gives that investor the right to sell 100 shares of XYZ at $160.
If XYZ falls to $140, the put option buyer can exercise the option to sell 100 shares at the $160 strike price, much higher than what they could sell it for on the market. Or, if the owner of the put option sold the option itself, they would lock in a $20-per-share gain, or $2,000 on the contract that cost $500.
Conversely, if an options contract holder sells a put option, that investor hopes the price of the stock will rise so they can keep the proceeds from the sale as profits, or they want to buy the protection of a guaranteed sell price if there is concern the stock could drop.
Know How to Read a Stock Options Quote
Stock options are listed daily on most stock-trading exchanges, including the New York Stock Exchange and the Chicago Board of Trade. Before you start trading options, take some time to understand how stock option quotes are listed, and what they mean.
- A stock symbol (like Apple’s AAPL) is used to identify an option’s underlying asset.
- For each stock, there is an options chain that lists the contracts available.
- The expiration date is the date the option/s contract expires.
- The strike price is the price at which the stock must be bought or sold if the option is exercised.
- The “type” is listed as the actual option, such as a call or a put.
- The price represents the cost to buy the option’s contract.
Other Types of Options Trades
With a general idea of the fundamentals of call and put options, investors can dive in deeper and employ multiple options trading strategies. These are some other frequently used strategies:
Covered calls. This strategy involves owning shares of the underlying stock and then selling call options against it. If the underlying security doesn’t rise above the strike price, the contract expires and the investor keeps the proceeds from selling the call as profit. The investor can then sell new calls with the goal of earning more money as they hold the shares. This is generally considered to be an income-producing strategy.
Married puts. This is a downside protection strategy against potential loss on the stock. As with covered calls, the investor owns the underlying asset, but in this case they buy put options. This gives them the right to sell the shares at the contract’s strike price, guaranteeing a minimum sell price for the length of the contract.
A long straddle. This strategy involves buying both a call option and a put option for the same underlying asset, using the same strike price and expiration date for both. The goal is to profit from a big move in the underlying stock, either up or down. The risk is the price of the puts and calls, whereas the profit potential is much higher should the stock make a big move.
A long call. This is another reference to your basic call option. The options investor buys a call option (professional options traders call that “going long”) with the expectation the underlying stock price will be higher than the contract’s strike price.
If the investor is right, and the underlying share price rises significantly, there’s no ceiling on the profit they can make. On the other hand, if the underlying stock price finishes lower than the strike price by the expiration date, the contract expires worthless, and the investor is out the cost of the call option. Remember, though, this is significantly less than the cost would be of buying 100 shares of the stock outright.
A long put. Same as with calls, this is your standard put strategy. When an options investor goes long on puts, it is with the expectation that the underlying stock will fall below the strike price by expiration. Here again, there is almost no limit on potential profits depending on how far the stock drops. The one limiting factor is if the stock were to go to $0, which rarely happens.
The risk on a long put is again limited to the price paid for the option. If the stock stays above the strike price and the contract expires, the investor loses the cost of the option.
Short put. A short put gets a little more confusing because you are basically shorting a short, meaning you are betting the stock will move higher instead of lower. In this case, the investor sells the put, collects the amount paid by the buyer, and expects the stock to trade above the strike price. The maximum profit is the amount collected by selling the put.
If the underlying stock closes below the strike price by expiration date, the investor who sold the put is obligated to buy the stock at the strike price.
Fast Fact: According to the Options Clearing Corp., the U.S. options trading market executed a record 9.93 billion contracts in 2021. That was a 32.2% rise from the year before.
How to Open an Options Account and Start Trading
Opening an options trading account is similar to opening an account to trade stocks – with a few important differences and caveats.
Here’s how to open for business as an options investor.
Check in with stock brokerages. If you already have a brokerage account, ask them about their options trading process. Having an existing relationship with a brokerage firm can expedite the options process.
In many cases, it is simply a matter of having your existing account approved for options, which may involve adding margin capabilities, which is the ability to borrow from the brokerage. That doesn’t mean you need to use it, but margin capabilities are required for many options trades.
If you do not have a current account or would prefer an options account at a different brokerage, start looking around and kicking some tires. Most leading brokerage firms (think Ameritrade, Fidelity, E*Trade, and Charles Schwab) offer options trading service and support.
As discussed, options require permission from your brokerage firm, which will likely want to know about your trading experience, your cash reserves, and your risk comfort level. Also, expect a minimum cash deposit before you can start trading options, with $1,000 being a standard minimum for infrequent options trading and $5,000 to $10,000 for more frequent trading.
The brokerage firm will also want to know about your overall investment objectives and your options trading strategy. Based on your responses, the broker usually grants approval from Level 1 through Level 4, with 1 incorporating the most basic strategies and 4 the most advanced and often riskiest strategies.
The basics of choosing a brokerage firm also apply to options. A good brokerage firm will offer ample and helpful customer service, trading software, tools to get you acquainted with and experienced in options trading, and research on all things stocks and options.
Choose your options strategy. Once you’re approved for options trading and have made your initial deposit, it’s time to start thinking about a trading strategy.
For new options investors, that likely means starting with basic call and put trading strategies.
Remember the basics as you start:
- If you expect the underlying security to rise in price, you can buy call options and/or sell put options.
- If you’re betting that an underlying security will decline in price, you can sell a call option and/or buy a put option.
As with any investment trading strategy (especially with often complex options trading), consider consulting an experienced financial adviser who is seasoned in options strategies, risks, and trading protocols.
Fast Fact: InvestorPlace’s John Jagerson offers one of the best online options trading courses out there: the Options Masterclass. Learn more about it here.
Tips and Strategies for New Options Traders
If you’re a mainstream stock market investor looking to break into options trading, join the club. Many of your fellow investors are doing the same thing.
Options are sophisticated investments – much more so than trading individual stocks. That’s where education and knowledge on all things options can go a long way for investors new to the options market.
Here are a few final tips to make your experience easier to manage:
Test first, trade later. Before you buy or sell options, test out the specific trade and closely monitor the process and outcomes. This practice trading is often called “paper trading.” There is no actual money involved, so it is a chance to get familiar with everything with no risk involved. Most options trading services provide easy-to-use trade testing software. Ask your broker how you can “test first and trade later” – they’ll likely have an options trading testing toolkit for you as part of their regular menu of trading services.
Lean on limit orders. In a word, limit orders ensure that your trade is executed at a specific price – the price you want. This can prevent you from getting caught by any sudden, sharp moves in the option or a big spread in bid and ask prices. A bonus: With option limit orders, you don’t have to spend all of your time tracking market prices, and you don’t have to rush any options trades for fear that the price will change.
You don’t have to hold your options contract until expiration. You will find many if not most options traders buy and sell the contracts without the intent of exercising them. If you own a contract, you can sell it prior to expiration and remove any obligation. Depending on the movement of the underlying stock, you could well make more money selling before expiration.
In addition, if the reasons for making a short or long options trade are no longer viable, you can unwind the trade. For example, if you sought to protect a stock position by buying puts but downside risk has receded, you can exit the trade prior to expiration by selling those puts.
Know your “breakeven” point. Each option position has a breakeven point, just as every stock position does. Be sure to factor in any fees, charges, or commissions that came with the trade. Most brokerages charge based on the number of options contracts traded.
Focus on the underlying stock. It can be tempting for options traders, especially new ones, to focus on options trading charts and forget to focus on the underlying asset’s chart. Remember, options are derivatives, so they derive their value largely from the underlying asset. It’s critical that you also fully understand the underlying stock, bond, or commodity that defines your trade. So go ahead and study the options charts and graphs – but be sure to know the underlying security, too.
Allocate your money wisely. Follow the basic rules of smart allocation. Don’t invest money in options that you can’t afford to lose. Plus, consider starting with a small portion of your portfolio as you build your confidence and knowledge.
Remember, too, that options can play a role in your stock investing strategy. Experienced traders use options for everything from generating income to acquiring stock shares below their current market prices to limiting a stock’s downside risk by locking in a sell price. More advanced traders use options to create complex speculative strategies.
In fact, one of the advantages of options trading is that it can be whatever an investor wants it to be, as long as it falls within the limits of that investor’s account size and risk tolerance. Consequently, any options trading should be based on a thorough assessment of your individual investment goals and the amount of risk you can absorb without losing sleep at night.
Read the “Bible” of Options Trading. For a thorough, relatively easy-to-follow education on options trading, read Options as a Strategic Investment by Lawrence G. McMillan.
Long considered the bible of options trading books, McMillan’s tome offers new options investors a bedrock look at options trading, along with practical trading strategies that are designed to curb risk and optimize profits.
Know What You’re Getting Into in the Options Market
Is options trading right for you?
That answer will be different for everybody, but it is becoming right for more and more people. It helps to have the knowledge, training, and patience to learn about one of the most sophisticated asset investment strategies available to individual investors.
That’s what we have tried to help you with.
The key is to enter into any options trading opportunity with your eyes wide open and to be armed with a thorough assessment of the risks and rewards on the table.
Going further, we recommend trying out John Jagerson’s low-risk way to generate potentially thousands of dollars per week in extra income, deposited directly into your account, using a simple options strategy you can use at home. Learn more about John’s Options Masterclass here.
Good luck in your investing. At InvestorPlace, we are here to help you realize your financial goals.
