If you’re looking to invest and maybe even make a little profit, options can be a great, low-risk trading opportunity. In many ways though, the process can be more complex than simply trading stocks. Keep reading to learn more about what options are, the benefits of trading them, and some helpful strategies for getting started.
Understanding Options
Options are contracts that give you the right to purchase or sell a predetermined amount of an underlying asset, like a security or an exchange-traded fund, at a certain price by a specific date. These details are agreed upon when you buy or sell an option. It’s important to note that though these contracts give the owner the right to buy or sell the stocks, they are not obligated to do so. Options can be split into two basic categories:Â
- Call Options: These are options that give the bearer the right to purchase a stock at a set price.
- Put Options: Put options give the owner the right to sell a stock at a certain price.
Why Trade Options?
If you’re looking to invest, trading options can be beneficial for a number of reasons, including:
- You can make extra money:Â You can make a profit and generate additional income.
- You can diversify your portfolio:Â Trading options can help you recover from other trading losses and protect your portfolio.
- It’s a cheap way to invest in the stock market:Â Options require much less capital than you would need to purchase a stock outright, allowing you to invest in the market without so much commitment.
- The risk is relatively low:Â Even if the stock drops drastically, you can’t lose more than you originally paid for the option.
Tips and Tricks to Make Money Trading Options
Trading options may seem easy enough, but like any type of investing, it comes with its fair share of risks. Here are some tips for getting started trading options and how you can make money doing it:Â
- Develop a basic strategy: When you’re just starting out, it’s a good idea to keep your strategy pretty simple. It can be helpful to read up on some common errors that options traders make so that you can avoid those same mistakes. Additionally, it’s important to learn and grow from your own experiences. After you get your bearings, you can develop more complex strategies and start branching out.
- Avoid buying out of the money call options: OTM call options have a strike price that is higher than the stock’s market price. Experienced traders sometimes do this to make profit, but it’s a strategy best left for when you get more familiar with options trading.
- Keep the expiration date in mind: Don’t forget that every option has an expiration date. You need to be prepared to make a move when necessary.
Whether you’re a seasoned trader or you’re just starting out, options can be a great addition to your portfolio. Just make sure that you do your research before diving in.