I’ve been learning some stock trading over the past year, and now I want to try doing some calls/puts. Where and how should I begin, you know the basics!
In: Economics
These are both options that can be agreed to by a buyer and a seller.
A Call option is an agreement that allows the buyer to buy stocks at a certain set price for a period of time, and the seller is obligated to sell them at that price. If the stock price ends up going higher than the agreed price on the market, the buyer still has the right to buy at the lower price. Then the buyer could turn around and sell it at the higher price on the market immediately if he desired.
A Put option is pretty much the reverse. The seller can sell and the buyer is then obligated to buy at a set price for a period of time, regardless of the market price. The market price can go lower, but the seller can still sell at the higher agreed-to price.
In either case, the option party is paying a fee to the obligated party to enter into the agreement, so the obligated party comes out ahead if the option is never exercised. Its kind of like insurance in a way.
The easiest way to start is with a bounded play like a covered call. You buy 1000 shares of something at say $50 and write 10 x 100 share call options for $100 with a strike price of $55 in 30 days.
Worst case, you have lowered your investment from $50K to $49K. If the stock soars over $55, you still make $6 per share, not a bad month’s work. If the stock hovers between 50 and 55, the calls are “busted”, and you make $1 per share and you can write another batch of calls the next month.
More complex plays can limit your losses in both directions, allowing you to make options money while the stock trades in a range while cashing out on big moves.
You need a lot of money for this, and you shouldn’t really make options investments without understanding what’s going on. Reading suggestions on Reddit is not sufficient research to make you a viable investor.
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