Basic Stock Options Trading Explained

So, you want to make some money using stock options trading method but not sure how. Ok,let's explain some options basic terms first before we start trading stock options using simple option strategy.

Types Of Options

There are only two types of Options: Puts and Calls.

You buy a CALL Options, if you think the stock /index price is going to rise and Buy a Put Options if you think the stock/index price will drop.

Stock Options Leverage

Using US listed Options, say you are buying 100 shares of Microsoft, currently trading @ $ 26 and you buy 100 shares, believing that it will at least go up to $30 soon. Excluding commission, this would cost you $ 2600 with potential profit of $ 400, which is 15% profit.

However, if you buy 1 x Microsoft 27.5 Call Options @ Call Premium of $0.9 , this will cost you excluding commission 100 x0.9=$90 and when stock price moves up to $ 30 , the new options value becomes say $ 5. Your profit would be $ 410 or (5-0.9)/0.9 x100=455 % . Wow! A lot of difference.

Hedging

If you own shares and do not want to sell them while the stock is doing it's normal correction/ retracement, you can use a PUT option to profit from the decreasing value of the stock.

Options Seller Obligations

If you sell ( also known as Write) a CALL , the buyer of the CALL can exercise it anytime if he or she chooses to once the options have 75 cent or more intrinsic value . You are obliged to deliver the stocks .

As an example to the above Microsoft Call OPTIONS, say HARRY bought the $ 27.5 Call Option and paid the right to do so for $ 90 excluding commissions.

The price has gone up to $30 now. Harry wants to exercise it thinking Microsoft price will go up even further. Now he has the right to buy from say Sally @ $27.5.

Although they have not met, Sally has the obligation to deliver the 100 Microsoft shares to Harry via her stock broker through option clearing house. Harry's stock broker will somehow purchase these shares via the option clearing house at the agreed price for Harry.

Likewise, if you sell a PUT ( selling someone the right to sell to you )and the Put option has 75 cent or more intrinsic value , you are obliged to buy the shares from the the Option clearing house via your broker at the original agreed price.

As a seller or writer of an option contract, you will receive a premium for the right to buy or sell the underlying instruments and is your to keep regardless whether the option is exercised.

Ready To Trade Options?

Now that you know the basic, let's see how we can use simple stock option trading strategy for our Stock Options Trading to make money when the market or you think the stock market is

• going down - put options
• going up - call options
• going sideway - monthly income covered call option

Options can also be combined to form option spreads which can give you higher probability trades.

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