If you want to use options to make more money on the stock market, you need to be able to correctly predict both the direction the stock will move and a rough time frame for that movement. If you get either of these numbers wrong, you will either lose or break even. On the other hand, if you are right, your profits could be more than three times what you would have made if you had just bought the stock straight up.
A person who owns an option has the right, but not the duty, to buy something. More specifically, stock options are financial instruments that come in four types: long or short positions on a put or call, and long or short positions on a call or put.
Someone buys a Put or a Call when they go long. When someone sells or "writes" a Put or Call, they are "short." Option writing is a more advanced topic, so this course will focus on the more common long or option buying. All positions are assumed to be long in the following explanations.
A Put is an instrument that makes money when the price of the underlying stock goes down. The value of a Put goes up when the stock goes down. A Put is the opposite of a Call. When the price of the stock goes up, so does the value of a Call.
As you can see, you buy a call if you think the stock price will go up. You buy a put if you think the price will go down. There are two more things that need to be said about an option. First, there's the date it runs out.
All options have an end date when they stop being useful. Remember that if you own an option, you have the right to buy something. This right is only good for a short time. Depending on the stock, there may be different options for several months in a row, or there may be a couple of months between options. An option always ends on the third Friday of the month, unless it falls on a holiday, in which case it ends on the Thursday before.
The strike price is the second part. This is the price at which the option can be taken advantage of. Again, an option is the right to buy something, and the price at which something is bought is called the strike or exercised price. Depending on the choice, these prices could go up by anywhere from $2.50 to $10.
All of this adds up to give you a lot of options when you want to buy an option. With calls or puts, different expiration months, and different strike prices within each month, there are a lot of choices.
With so many options, the number of contracts traded for a certain option for a stock that hasn't been in the news much can be low. This could make it harder for you to trade or cause a big difference between the bid and ask prices.
If you can predict what will happen to the price of a stock within a certain amount of time, you might be able to use stock options to triple your returns. Many investors have found these patterns, and by carefully choosing the right stock options, they are making great profits.
