How to Buy and Sell Options Without Making a Fool of Yourself | Barron's
Options are often seen as fast-moving, fast-money trades. Certainly options can be aggressive plays; they're volatile, levered and speculative. Options and other derivative securities have made fortunes and ruined them.
Options are sharp tools, and you need to know how to use them without abusing them. Reuters Because options have this rogue reputation, their where to buy an option side is frequently overlooked.
Thinking about options as an investor, not as a trader, gives you, well, more options.
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Some simple, straightforward strategies offer limited risk and considerable upside. At the same time, conservative investors can rely on stock options as a source of income and a protective hedge in market declines.
When a "call" option hits its strike price, the where to buy an option can be called away.
The distinction between American and European options has nothing to do with geography, only with early exercise. Many options on stock indexes are of the European type. Because the right to exercise early has some value, an American option typically carries a higher premium than an otherwise identical European option. This is because the early exercise feature is desirable and commands a premium.
Conversely, with a "put" option the shares can be sold, or "put," to someone else. The value of puts and calls depends on the direction you think a stock or the market is heading. Stated simply, calls are bullish; puts are bearish. The beauty of options is that you can participate in a stock's price movement without actually holding the shares, at a fraction of the cost of ownership, and the leverage involved offers the potential for sizeable gains.
Of course, this doesn't come free. An option's value, and your profit potential, will be impacted by how much the stock price moves, how long it takes and the stock's volatility. You can be right on direction but run out of time, since options expire, and trading activity might not work in your favor. In addition, leverage cuts both ways. Its Web site, www. The Options Industry Council, www.
Using a trader's tool to generate investment income and hedge portfolios
There are dozens of complicated options strategies, some more speculative than others, but two of the most conservative uses of options are to generate income and to cushion a portfolio from downside risk.
To produce income, you sell calls on shares you already own. This is known as writing a "covered call" or a "buy-write" strategy.
He has provided education to individual traders and investors for over 20 years. Article Reviewed on February 01, Gordon Scott Updated March 12, Traders buy a call option in the commodities or futures markets if they expect the underlying futures price to move higher. Buying a call option entitles the buyer of the option the right to purchase the underlying futures contract at the strike price any time before the contract expires. Most traders buy call options because they believe a commodity market is going to move higher and they want to profit from that move. You can also exit the option before it expires—during market hours, of course.
Here's how it works: Suppose you own shares of Intel Corp. But you would make a 3. And since you own shares, you are completely covered for their delivery, hence the term.
Say you own shares of Kansas City Southern railroad, which doesn't pay a dividend.
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Sell one covered call, representing half of your position. If the stock goes sideways, the premium counts as income. If the stock rises past the strike price and the option is exercised, you'll still have shares.
The strike price of a put is the exercise price at which you'll sell the stock. Puts are more costly in volatile markets, when insurance is on everyone's mind. Plenty of deep-discount brokerages will be glad to take your money.
- A put option allows investors to bet against the future of a company or index.
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It's better to sign up with a brokerage that, while maybe not the cheapest, can connect you with options experts, such as you'll find at Schwab, E-Trade, TD Ameritrade and OptionsXpress, or a major Wall Street firm. Trading near expiration An option has value until it expires, and the week before expiration is a critical time for shareholders who have written covered calls.
Timing is everything.
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Keep a close eye on the calendar if those options are in the money, Frederick says. The stock could be called before expiration. If you want to keep your shares and at least part of the premium, buy the option back before that happens, he adds.
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With a protective put, time is working against you as expiration looms. If the stock hasn't moved down enough, you might decide to sell that put and forfeit some, but not all, of your premium.
Every time. NerdWallet, Inc. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice.
Dividend-paying stocks It may be weeks until your covered call expires, but if it's in the money your stock is likely to be called away the day before the company pays its quarterly dividend. Whether you're bullish, neutral or bearish about stocks will guide your options investing decisions.
If you're bullish and more speculative, for instance, consider buying calls on stock you don't already own.
Also, Cusick says, comparing the time remaining on the option with a stock's historical volatility — the OptionsXpress Web site, for example, has a gauge of recent price activity — can give clues into the stock's potential to fluctuate. For income-oriented investors looking to write covered calls, higher volatility equals a larger premium.
But there's also a greater possibility that a stock will have big price swings that could go against you. Keep a short-term perspective and book the income quicker, Cusick says.