Stocks and options are popular investment tools for clients to yield a profit. Most clients gravitate towards stock because the concept is easier to understand. Experts recommend a varied portfolio. Options are considered, in addition to stocks, because the opportunity for larger returns or earnings is greater. However, higher earnings are associated with higher risk.
The value of an option is contingent upon another security, such as a stock or a bond. Stock options describe options based upon stocks. Options give the investor the right to buy or sell a security at a specified price for a specified period of time. Because the option or right to buy is only valid for a given period of time, options are viewed as wasting assets. When the option reaches its expiration date, it is deemed worthless.
Calls and Puts
Call is the terminology used for purchasing an option. Put is the terminology used for selling an option. Call options are options that possess an underlying security that should be purchased at a later date. Put options are recommended to investors who expect the price to be lower in the future.
The predetermined price to buy or sell a security is called a strike price. Each option gives investors the right to buy a specified number of stocks before the expiration date at a predetermined price called a strike price. If investors are given a strike price of $50, then investors have the right to buy options at that price until the expiration date.
Expiration date describes the predetermined date to buy or execute a sell of an option. A variety of expiration date types exist. An option with an American expiration date can be exercised immediately. Investors are not required to wait a specified period of time after purchase to exercise the option with an American expiration date.
Investors who purchase an option with a European expiration date may not exercise them until a predetermined date. Most options have an American expiration date. Investors should inquire before purchasing to determine the type of expiration date. Although the expiration dates are classified by country names, the name does not refer to the country of origin.
Options are typically purchased via a contract. Experts set a minimum contract amount and price that investors can purchase. For example, the minimum contract may be 100 shares at $50 per share. Given this information, the minimum investment will be 1 contract for $5,000. Investors must research the option to determine the number of contracts for a prudent investment.
Beginners Strategies for Trading Options
There are numerous strategies for trading options. Some of the strategies are listed below:
- Options Trading Strategies
- Bullish Trading Strategies
- Bull Call and Bull Put Strategies
- Out-of-the-money Covered Call
- Bearish Trading Strategies
- Bear Call Spread
- Bear Put Spread
- Neutral Trading Strategies
Details of the strategies will be explained in depth in a later article. Some of the strategies may be difficult to understand for beginning investors. Before exploring the world of options, investors must exercise due diligence to avoid costly errors while investing.
In general, investors begin the options investment process by calculating the minimum profit desired on the investment. If the minimum profit desired per share is $3 dollars, the investor must exit the market before the option falls below this particular price point. For instance, if the contract is 100 shares at $50, an investor should sell before the options price falls below $53 per share. Most investors will also subtract the cost to execute the trade to reflect actual profit.
Online Stock Analysis Tools
Most stock analysis tools featured on Top Ten Reviews will support options trading. Xtend by OptionsXpress is one particular tool that is reputable and also supports options in addition to stocks and futures. Our top-ranked stock analysis software, eSignal Advanced Get, also supports options trading.
Investors may use tools in the stock analysis software to automatically execute a purchase or sell if the option reaches a predetermined price. Individuals who desire to speak with a broker may also execute a broker-assisted trade for an additional price. Using the stock analysis software, investors may test various strategies to determine the best way to maximize profit. Investors who utilize stock analysis software remove emotion from selecting a quality options investment. The tools provided in the stock analysis software will help investors predict the outcome of certain strategies by testing each scenario.