Want To Get Rich Trading Options?
A veteran options trader once said,
While trading these types of securities can be risky, it can be very profitable as well. It's also a great way to hedge yourself against market losses. What are they? They are contracts that give the owner the right to buy or sell property at an agreed upon price. Calls These give its buyer the right to buy 100 shares of the underlying security at a fixed price before a certain date. For this, the buyer has to pay the seller of the contract a fee called a premium, which is forfeited if the contract is not exercised before the set date. A call buyer is confident that the stock price will rise before the contract expires. For example, a call on 100 shares of XYZ grants its buyer to right to buy 100 shares of that stock at a price of $50 per share in the next 3 months. Let's say the stock is currently selling at $45 per share. To buy that contract, the buyer may have to pay the seller of the contract a premium of $2 a share, or $200. If the stock shoots up to $60 per share in the next 2 months, the buyer of the contract could exercise his right to buy the shares at $50, and then immediately sell the shares on the open market for $60, keeping the $10 profit per share, minus the $200 premium he paid the seller of the contract. This way, the buyer just made $8 per share, or $800, after only laying out a $200 investment. The most he could have possibly lost was his $200 had the contract expired worthless. You can buy and sell calls on a security the same way you might buy and sell the security itself. The problem with buying options, either calls or puts, is that time is always working against you. As you get closer to the expiration date of the contract, the value of the contract decreases. Puts Puts are the exact opposite of calls. An owner of a put is confident that the price of the underlying stock or security is going to go down in value before the contract expires. If the security does go down, the value of the put increases. Many investors will buy puts if they own a stock that they think is going to decline in value, but they don't want to sell it yet. Maybe they have a big capital gain on the stock that they don't want to realize yet. But you don't have to own the stock to buy puts on it. You can buy and sell the puts on a stock just like you would buy and sell the stock itself. In reality, most call and put contracts are rarely exercised. Instead, investors buy and sell options before expiration, trading on the rise and fall of premium prices. Because the buyer must only put up a very small amount of money to control a large number of shares of stock, options trading provides a great deal of leverage and can prove immensely profitable. Covered Calls Traders can sell or write call contracts when they own the underlying security. This makes it a "covered" position. In this way, if the option were to be exercised. Since the majority of contracts expire worthless, the person who sold or "wrote" the contract gets to keep the premium. This is a great way to generate extra income from a portfolio of stocks that you own. Worst case scenario is that the stock goes up in value above the strike price prior to expiration. In this case, your stock could get "called away" from you, or taken away from you, at the designated strike price. In this case, you're essentially selling the stock at the strike price, which would be less than the current market value. Covered Puts Traders can do the same thing with Put contracts when they own the underlying security. You would use this strategy when you think the stock price will at least hold steady, or go up in value before the designated contract expiration date. As long as the stock closes above your strike price on expiration date, you get to keep the premium. Pretty nice! Naked Options Yes, this is a family site, don't worry. This is where to sell or "write" options when you do not own the underlying stock. This is the riskiest strategy of trading because your risk is virtually unlimited. If you are selling a naked call, and the stock goes up, you are losing money. For each contract that you sold, you lose $100 for every dollar that the stock rises above your strike price. If you sold a naked put, your risk is not unlimited, because the stock can only go to zero in a worst case scenario. Because of leverage, selling naked contracts is a very risky way to trade. These are the people who we think typically end up with the "small fortunes".
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