Buying and Selling Stock Options

Options trading is available to everyone today and is an excellent way to add to your financial portfolio. Protecting your investment is important and in order to do so you must understand the leverage that exists for each trade and know how much you can comfortably lose should prices fall. There are a number of strategies for buying and selling stock options and choosing the strategy that works best for you is also very important. Learning a bit about the overall process will help you to make wise decisions on where to place your investments. You should also learn your obligations when selling or buying call and put options in order to better protect your investment.

When you buy with the call option this gives you the right to buy one hundred shares of stock at a specified price. You are under no obligation to purchase these shares but you can if you wish to do so. The price that you will pay for the one hundred shares is known as a strike price. You should understand that the strike price will only last for a specified length of time. The premium that you will pay depends on the length of time of the strike price as well as the volatility of the underlying stock. Premiums are quoted per share which means that if you purchase 100 shares and the strike price is $2 then your total cost for the stock purchase will be $200. Buying with the call option is considered a low risk because you cannot lose more than the total premium that you pay for the option. However, you do have the opportunity to potentially make an infinite return on your initial investment.

Writing a call should also be understood before you begin investing. This involves selling the right to someone to purchase one hundred shares of stocks at a specific price for a specific period of time. Buying a put option is the direct opposite of buying a call option. Put options give you the right to sell 100 shares of stocks to anyone at a specified price for a specified period of time. With a put option you do not have the opportunity for infinite gain. Instead you can only gain the difference between the strike price on the put option and zero. You will pay a premium to have the right to sell your shares and the time value of your shares will diminish as the time grows shorter. It is a good strategy to only buy a put option when you feel that the stock price will drop before the contract time expires.

Selling a put option is when you give someone the right to sell one hundred shares to you. The maximum amount of money that you can lose when you sell a put option is the different between the strike price and zero. This is of course minus the premiums that you have received for the sale. You should sell a put option when you feel that your stock prices will increase in value or if you simply want to hold on to one hundred shares of a stock that is priced below where the current market trading value lies.

Understanding the basics of buying and selling stock options will enable you to make wise investments and potentially add to your financial portfolio. If you are completely new to trading then learning more about the process is recommended. There are many informative articles and websites that will help you to better understand the proper way to buy and sell stocks while protecting your investment and ultimately making a good return on that investment.

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