Puts And Calls Quotes
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. Puts And Calls Quotes
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. Puts And Calls Quotes
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