It might interest to know there is more than meets the eye with the stock market. At the most basic level, you can purchase stock in some of the strongest corporations in the world. If you add in companies located in other parts of the world, there are literally thousands of companies in which you can invest.
If you are looking for a more fun and exciting way to participate in the market, you might want to look into buying or selling stock options.
If you are fairly new to stock market investing, you may not know what stock options are or how you would go about making money with options. Perhaps, the following information will give enough insight to make you comfortable playing stock options.
What is a Stock Option?
A stock option is a short-term stock market investment alternative.
There are two types of stock options: calls and puts. A call option gives the investor the right to buy 100 shares of the underlying stock at a predetermined stock price called the “strike” price.
The investor has that right until the option reaches its “expiration” date, which will fall on the third Friday of the applicable month. A put option is the right to sell 100 shares of the underlying stock under the same parameters.
In both cases, the investor can wait until the option reaches the expiration and “exercise” the option (buy or sell 100 shares), or they can buy or sell the actual stock option at anytime prior to expiration.
The Benefits Of Stock Options
If you purchase stock in a company, the powers to be would like you to do so in blocks of 100 shares. That could get expensive if you were wanting to invest in a company like Microsoft.
At today’s stock price of $154, you would have to invest $15,400 plus commissions to buy 100 shares of Microsoft.
Stock options offer you an alternative to participating in Microsoft’s stock at a fraction of the cost of buying the actual stock. What a great benefit.
You would have the ability to control 100 shares of Microsoft’s stock for a few weeks to a few months for an investment of a few hundred dollars, depending on the strike price versus the actual strike price.
By purchasing the option, you are also limiting your loss exposure to the amount you paid for the option while having unlimited profit potential up until expiration. That’s another great benefit.
Finally, you can use stock options defensively to protect your investment in the actual underlying stock.
How to be Making Money With Options
For all intents and purposes, playing stock options is like wagering on whether a stock’s price is going to go up or down in the near future. If you are going to be making money with options, you need to be able to anticipate stock movements.
If you are a novice stock investor, you might want to seek advice from investment professionals. There are well-educated people who are devoting their lives to research and analysis to help them decide which way they believe certain stocks are likely to move.
If you prefer to be more hands-on, you could invest time learning about fundamental and technical stock analysis.
You make money with stock options when you are correct more times than you are wrong.
To enhance the probability of making profits, there are a number of stock options strategies you might want to learn about. Each strategy is specifically designed to help you limit your loss exposure while offering some level of profit potential.
Since many of a dozen or more strategies can be very difficult to understand, you’ll want to educate yourself about how each strategy is employed and what it offers.
Common stock option strategies include spreads, straddles, cradles, writing covered calls, writing naked calls and writing puts.
Investing in stock options is like anything else you might decide to take on as an investor.
The more you know about stock options, the more likely you’ll be a successful options player. The information provided is here to give you a general idea of what you can expect if you decide to go in this direction.