Platinum Swing Trade Alerts

The 10-Buck Broker (Long-Term Stock Picks)

Announcement

Collapse
No announcement yet.

How Do Puts and Calls Work?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • How Do Puts and Calls Work?

    The principles of stock option trading can be quite intimidating if you're new to options trading. Once you get the hang of things you'll be trading stock options like it's second hand nature. I'll be forever grateful to the person who taught me how to trade stock options, because financially it's been very rewarding.

    Sharing what I know reinforces my own knowledge, and also allows you to learn some basic principles of stock option trading. Maybe you too can achieve 100%+ returns on your money.

    I do feel that learning the principles of stock options trading is essential for any investor. Their versatility and profit potential is nearly unmatched in the stock market arena.

    Before we delve into some of the principles of stock option trading, let me briefly explain stock options.

    What are Stock Options?

    If you buy or own a stock option contract it gives you the "right", but not the obligation, to buy or sell shares of a stock at a set price on or before a given date.

    So essentially it's a contract that grants you certain rights. In this case you have the right to buy or sell a stock. You're not obligated to buy or sell the stock; you just have the right to do so.

    Stock options are also called derivatives. That's actually their proper name.

    Children are derived from their parents. Cheese is derived from milk. Stock options are derived from stocks. You can't have the latter without the former.

    Technically speaking, the term derivative refers to how the price of these contracts is derived from the price of the stock. Their value is dependent on the price of the stock it was created for. Goldman Sachs (GS) stock options are created for Goldman Sachs the stock. Generally, the option's value will rise and fall in sync with the stock price.

    Principles of Stock Option Trading: Puts and Calls

    Puts and Calls are essentially the main two components of options trading. They are the only two types of stock options. Everything else is just a variation or combination of Puts and Calls.
    • The "Put" option gives its buyer the right, but not the obligation, to sell shares of a stock at a specified price on or before a given date. After this date, your contract expires and your option ceases to exist. "Put options" increase in value when the underlying stock it's attached to declines in price, and decrease in value when the stock goes up in price.
    • The "Call" option gives its buyer the right, but not the obligation, to buy shares of a stock at a specified price on or before a given date. After this date, your contract expires and your option ceases to exist. "Call options" increase in value when the underlying stock it's attached to goes up in price, and decrease in value when the stock goes down in price.



    Okay, I assume you understand how buying shares of stock can be profitable, but how can trading stock options be profitable?

    Trading Stock Options

    Let's say that you purchased a call option contract that gives you the right to buy Goldman Sachs (GS) for $70. Three months later GS is trading for $143, but you hold a contract that gives you the right to purchase it for $70.

    Do you think your contracts perceived value has increased? Yup, it sure has. So essentially you turn around and sell it for more than you paid for it.

    It seems too simple, but I've been successfully trading stock options for years doing exactly what I've shown you above. Once I learned how to trade stock options and experienced my first 100% return on my money I was sold for life. I've also shown my students that learning the principles of stock option trading really doesn't have to be as hard as the gurus make it out to be.


    Article Source: http://EzineArticles.com/2457034
    Platinum Swing Trade Stock Alerts(FREE 14-Day Trial)

    The 10-Buck Broker (Long-Term Stock Picks)


    Best Stock Picking Services

    Sign up for the forum to reply to this post!!!


    Best FOREX Signals Software

    Stock Market Investing For Beginners


    "Step into the arena and hold on to your hat. Don't get discouraged if you don't make 8 trillion dollars in your first month. Trading is not a get rich quick scheme. Realize that trading is a skill and just like any other skill it takes time to learn. Have convictions in your decisions in life and trading. Ignore the comments and "advice" of those that have never traded a day in their life."


    Terms Of Service

    Disclaimer: This website provides information about the stock market and other investments. This website does not provide investment advice and should not be used as a replacement for investment advice from a qualified professional. This website is for informational purposes only. The Author of this website is not a registered investment advisor and does not offer investment advice. You, the reader, bear responsibility for your own investment decisions and should seek the advice of a qualified securities professional before making any investment.

    Promoted content: You should assume that this website has an affiliate relationship and/or another material connection to the persons or businesses mentioned in or linked to from this website and may receive commissions from purchases you make on subsequent websites. Always exercise due diligence before purchasing any product or service. This website contains advertisements.
    Best stocks to buy now Stock Market
    Best stocks to buy now
    Dow Jones TodayDJIA
Working...
X