Options trading made easy
Options may seem complex and inscrutable, especially to newbies. But once you understand the basic concept, it’s much easier to delve deeper into the world of options and create strategies that go far beyond what you can achieve by just buying and selling stocks.
The concept is practically as old as the markets themselves: With an option, you are paying for the right to buy or sell something at a specific price on a predetermined date. But that’s not all: You can not only buy options, but also “write” them and thus collect the option premium – a strategy that professionals in particular like to use. The entry instruments in options are calls and puts. With calls you can profit from rising prices, with puts from falling prices.
Options can perform many functions. For example, if you are long in stocks, a put option that increases in value when the price falls can act as a hedge against a fall. A trader with a stock position, on the other hand, can sell calls against his stock position as a writer to generate additional revenue in the form of option premiums. A trader may also buy a call (or sell a put) to participate in an expected up move, or buy a put (or sell a call) to take advantage of a down move.
In summary, buying a call option allows the holder to participate in an upside move. The tricky part is determining which call is best to buy, or if an alternative strategy with more than one option offers better risk/reward.” – Excerpt from “Options Trading Made Easy” in Traders Magazine.