What Is Options Trading?
If you want to start trading options, the first step is to clear up some of that mystery. What are options, and why should I consider them? An option you purchase is a contract that gives you certain rights.
Depending on the option, you get the right to buy or the right to sell a stock, exchange-traded fund ETFor other type of investment for a specific price during a specific period of time. Investors and traders use options for a few different reasons. For example: You can potentially make a profit—and not just when a stock rises, but also if it goes down.
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Options allow you to invest in the market while committing much less money than you would need to buy the stock outright. Options can help protect your portfolio. For example, if you own stocks, options can help protect those positions if things don't turn out as you planned.
Certain options strategies can help you generate income. The two basic types of options There are two broad categories of options: " call options " and " put options ". A call option gives the owner the right to buy a stock at a specific price.
The distinction between American and European options has nothing to do with geography, only with early exercise.
But the owner of the call is not obligated to buy the stock. A put option gives the owner the right—but, again, not the obligation—to sell a stock at a specific price.
It's up to you whether you use it. Normally, you'll only use the coupon if it has value. Obviously not.
In the language of options, you'll exercise your right to buy the pizza at the lower price. Now, let's translate this idea to the stock market by imagining that Purple Pizza Company's stock is traded on the market.
Or you could hold on to the shares and see if the price goes up even further. Either way, you will have used your option to buy Purple Pizza shares at a below-market price. Options who trades you bought the option when it had less value—i.
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This is a good place to re-emphasize one key difference between a coupon and a call option. Most coupons are free, but as we've mentioned, you have to buy an option.
The price is known as the premium, and it's non-refundable.
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You don't get it back, even if you never use i. So, remember to factor the premium into your thinking about profits and losses on options.
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Understanding puts The second type of option—put options—are a form of protection. They give you the right to sell a stock at a specific price during a specific time period, helping to protect your position if there's a downturn in the market or in a specific stock.
Getting started with options trading: Part 1
It's a simple idea. Now you've learned the basics of the two main options who trades of options and how investors and traders might use them to pursue a potential profit or to help protect an existing position. Brokerage account Investing and trading account Buy and sell stocks, ETFs, mutual funds, options, bonds, and more.
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How it works d1.