![]() Options trading does come with a number of risks. Conversely, bullish traders sell put options in the hope that the underlying asset rises above the strike price, in which case they won't have to buy it (and can therefore pocket the premium). Bearish traders will sell call options in the hope that the underlying asset doesn't rise above the strike price, in which case they won't have to sell it. By selling either a put or call option, traders will pocket the premium paid by buyers. calls) or a position you want to own (i.e. Provide income: "You can sell puts and calls, which are conservative strategies to earn income on a position you own (i.e. By doing this, they have the option to defray some of their losses if Company X falls in price since the put option's strike price will likely be above Company X's actual price. For example, if an investor owns a significant number of shares in Company X, they can alleviate their risk by buying a proportionate number of put options on the same company. Hedge risk: If you own a big stake in a stock outright, you can use an options contract in order to reduce potential losses." A conservative investor may use options to hedge a large position," says Robert Ross. The idea of "controlling 100 shares of Tesla stock for a fraction of the cost attracted many investors to options," says Moya. It's an easy, low-risk way to watch a red-hot stock - like electric car-maker Tesla was in late 2020. Rights without obligations: Trading options grant investors buying/selling rights over particular shares, but without the cost that comes with actually buying those shares outright. The main attractions of options trading include: The only thing you will have lost would be the money you paid for the premium. Remember, the option didn't obligate you to buy or sell anything, it just gave you the chance to. Needless to say, if the underlying stock doesn't fall (or rise) the way you hoped, meeting or exceeding your strike price, you simply let your options contract expire. That's because your strike price ends up being higher than the actual price at expiration. If you have the same strike price of $500, yet shares in the Big Tech Company fall to $400, you'll make a profit of $10,000 again (minus your premium). ![]() Put option exampleĬonversely, buying a put option means that you're counting on the price of the Big Tech Company falling before the expiration date. However, if shares in the Big Tech Company rise to, say, $600 before the expiration date, you'll make a profit of $100 per share, or $10,000 in total (minus the $1,000 premium). This means you'll have to pay a total premium of $1,000 for the option. Let's say your premium is $10 per share, and the options contract is for the standard 100 shares. The lower this strike price is in relation to the Big Tech Company's current price, the higher the premium you'll have to pay. Let's say you buy a call option for Big Tech Company with a strike price of $500 and an expiration date of a month from now. ![]() To show how options trading works, let's walk through a couple of scenarios. ![]()
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