How to make money on an option


Pin1 3 Shares Options are a financial instrument that you can use for a number of different purposes: as protection against expected moves in an underlying instrument such as a stock; as a way to use leverage how to make money on an option control more of a stock than you want to buy outright; as a way to use your existing investments to earn additional cash; and many other uses.

But, can you get rich trading options? Since an option contract represents shares of the underlying stock, you can profit from controlling a lot more shares of your favorite growth stock than you would if you were to purchase individual shares with the same amount of cash.

When your chosen stock flies to the moon, sell your options for a massive profit. Rinse and repeat and before you know it, you will be buying that mansion you have had your eyes on since forever.

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There are other ways as well. If you expect a company to declare bankruptcy, but no one else seems to know about it, then you can buy puts.

When your expectation is realized and the underlying stock goes to zero or close to itsell the puts and pocket your winnings. The more volatile the how to make money on an option stock, the more the puts will sell for and the larger your gain will be.

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Use one or all of these strategies repeatedly until you are rich. Before you know it, you will be moving into that mansion by the lake that you have always had your eyes on.

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Easy, right? Well, maybe not so easy… There is one element that each of these so-called strategies have in common: they are more akin to gambling than to trading. In fact, if you are not careful, you are far more likely to go broke trading options than you are to get rich. There is a very good reason that the U.

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S Securities and Exchange Commission has qualification rules in place for investors who want to trade options as there is a lot of risk involved.

They want to make sure you have enough investing or trading experience to hopefully make good decisions when it comes to options. Does all this mean that you cannot get rich with options?

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Not at all. Three Ways to Help You Succeed It turns out that the question we asked above about how to get rich with options is the wrong question.

Warren Buffet Uses Option Income Strategies

Or put another way, how do you reduce risk in trading options? To accomplish that, there are three interrelated things that I recommend you do.

However, it is not that easy. Money must be earned and please believe that no one gives it away. Here is a look at the pitfalls of buying options before you are ready to trade. You can hardly wait to see the money roll in. So what happens?

First, throw out your crystal ball and educate yourself. Hone your skills with practice and study. You have to understand the company that you plan to trade and admittedly, that takes a lot of time and effort.

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What is its market position? What are its strengths and weaknesses?

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Does it have a competitive moat that makes it difficult for new competitors to enter the market? Are there any significant risks?

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Who are the leaders and are they invested in the company or are they stringing it out? Next, look to the future. Some traders use charts to help them gauge future price movements which means studying and learning chart patterns and how they pertain to the industry your chosen equity is in.

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How has the stock moved in the past in response to events such as earnings? While past performance is no guarantee of future open positions in options sound familiar?

This effect is likely more pronounced for short-term or event-driven movements and therefore might be more relevant to shorter-term options strategies.

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Other traders use fundamental analysis to guide their future expectations. You should learn to read quarterly financial statements.

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Once you have a fair-value price, you can use an appropriate options strategy based on your level of acceptable risk.