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The world of investing is certainly not for the faint of heart. But there are little ways you can get into it without needing a bank account the size of Sara Blakely’s. Ever heard of options trading? It might be of interest to you to know that this form of trading does not come with years of schooling and experience on Wall Street to achieve success. Here are some things you need to know about options and what your “options” are when getting into them.
#1) First Off, What Is an Option?
An option is essentially a contract representing a choice made around stocks, equities, etc, that you can buy from someone or sell to someone. The contract will always share certain characteristics, such as the fact that it will for 100 shares at a set price, the contract will be based on some underlying stock, the option contract will always expire at a mentioned date, and it will always have what is referred to as a Strike Place. There are also two different versions, called a Call or a Put. (A Call is buying, a Put is selling.)
#2) Start Small
While there are huge growth potentials involved in options trading, there are of course also big potential losses to contend with. It’s never possible to completely predict the market so like many other types of trading the possibilities for the fate of your money are multifaceted. Until you’re more comfortable with the options, it’s best to start off trading a few at a time to see how things go, as opposed to putting everything in. Options trading should be just one portion of an active portfolio.
#3) Know How They Can Cut Risk
It can be helpful to think of options trading in a similar manner to taking insurance out on your car. When you have insurance for your car you pay only a portion of what the cash value of your car is, but with the trust that if you get in an accident you could get back the full value of your car. Buying an option contract is similar in the sense that a buyer can let a stock option expire when they’re wrong about the stock gain or loss they predicted. Basically you would only miss out on the stock premium, not on the total value of the shares.
#4) How to Make Money With a Call Option
With a Call option, the buyer has the option of buying the option when the value of the stock rises above the strike price line, and before it expires. Then it can be sold to someone else for less than the current market rate, but more than the premium. If it is above the premium than there is a gain being made no matter what.
#5) How to Make Money With a Put Option
When you’re the buyer in a Put option, the value of the stock should fall below the strike price. The 100 shares of the put option can then be sold an amount that is higher than the premium of the option.
#6) Have a Plan Before the Expiration Date
When you exit plan well before the expiration date of the trade then you can worry less and feel more in control of your trading. This goes beyond just thinking about minimizing your losses. Many traders worry about getting out too early and missing some of the money they would have gained by staying longer, but the flip side to this is that a gain is a gain, and if you’re not worried about losing the money still, then you might be able to enjoy the process a little more.
The best thing to do is to set an upside goal that you want to reach and then walk away with the profits instead of holding on and pushing for more when you still have the potential to lose it. The same goes for the downside on stopping the loss. Having the goal number set in stone before you begin will actually make you feel like you accomplished something as opposed to being unsure about where you stand.
Being informed about your options is always the best way to make successful move with your money, so make sure you’re confident in your understanding of options trading before you begin.
Are you considering getting into options trading or is this a new concept to you? Let us know if you’re planning to try or if you have any tips of your own to share!