Speculating in options. Speculating With Options | Personal Finance Lab

speculating in options
Speculation in Options Fortunes are made and lost with options speculation. Some will tell you trading options is like gambling. However, if you understand their characteristics and how to price them, they can be a very powerful addition to your trading arsenal. Options provide leverage, and when used correctly, they could be great for speculation.

By Albert Phung Updated Oct 25, As a quick summary, options are financial derivatives that give their holders the right to buy or sell a specific asset by a specific time at a given price strike price. There are two types of options: calls and puts.

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Call options refer to options that enable the option holder to buy an asset whereas put options enable the holder to sell an asset. Speculationby definition, requires a trader to take a position in a market, where he is anticipating whether the price of a security or asset will increase or decrease. Speculators try to profit big, and one way to do this is by using derivatives that use large amounts of leverage.

This is where options come into play.

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Options in Operation Options provide a source of leverage because they can be quite a bit cheaper to purchase in comparison to the actual stock. This allows a trader to control a larger position in options, compared speculating in options owning the underlying stock.

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In these cases, all gains and speculating in options will be magnified by the usage of the options. All the options would be worthless then because no one would exercise the option to buy at a price that is greater than the current market value.

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The speculator's anticipation on the asset's situation will determine what sort of options strategy that he or she will take. If the speculator believes that an asset will increase in value, he or she should purchase call options that have a strike price that is lower than the anticipated price level.

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In the event that the speculator's belief is correct and the asset's price does indeed go up substantially, the speculator will be able to close out his or her position and realize the gain by selling the call option for the price that will be equal to the difference between the strike price and the market value.

On the other hand, if the speculator believes that an asset will fall in value, he or she can purchase put options with a strike price that is higher than the anticipated price level.

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If the price of the asset does fall below the put option 's strike price, the speculator can sell the put options for a price that is equal to the difference between the strike price and the market price in order to realize any applicable gains. Compare Accounts.

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