Trading Options For Beginners

Trading Options 101

Have you ever been told that trading options are too complicated to understand or too risky to invest in? The truth is options are no more complicated than buying a stock. Learning how to trade options can actually help you reduce your investment risk! This article will show you the power of options trading, give you a basic understanding of how trading options work and the real risks of investing in them.

We will start by looking at a call option, a term you may have heard of before. A call option gives you the right to buy 100 shares of a specific stock, at a specific price, at some time in the future. You’re not buying the actual stock at that moment, but instead the option to buy that stock at a later date for a fixed price. The great thing about the call option is that you are not actually obligated to buy the 100 shares if you don’t want to and you can sell this call option to someone else at any time.

This may seem a little complicated, but this short video should help you understand the basics of options trading.

Options Trading Example: Ford

Here’s an example that will help you understand call options and their benefits more clearly.


FordStock

You believe that Ford Motor Company has really gotten its act together in the last few years and you want to invest in their future. If you know nothing about options and how they work, you would place an order to buy 100 shares of Ford (F) @ $13.98. This trade would cost you $1398 (plus commissions). You now own 100 shares of the stock and your upside profit potential is limitless, while your maximum loss is the $1398 that you invested in buying the 100 shares of Ford stock.

How To Trade Options

With a call option on Ford, you can still participate in the upside potential that owning 100 shares of Ford stock offers but reduce the amount of money that you have at risk.  Let’s see how this is possible by trading options on Ford instead of buying the 100 shares of Ford stock.

If you think that in the next few months the stock is going to rise significantly, you might want to buy (1) Ford December 16, 2016 $14 call option @ $.69. This will give you the right to buy 100 shares of Ford stock at a price of $14 at any time until December 16, 2016 when this right to buy those shares expires.

That date is known as the expiration date and the price that we chose, in this case the 14, is known as the strike price. The cost of this call option or right to buy Ford @ $14 until that expiration date is 100 shares X $.69 or $69.00. If the stock goes to $20 by December you would be able to sell the option for at least $6.00 or $600 and make a nice $531 profit.

You can also choose to exercise the option and go ahead and buy the stock for $14 even though it is currently trading @ $20. You would still have an unrealized profit of $531.  If you look at this example you end up with a profit that is only $69 less than if you bought the stock outright, but you only had $69 of cash at risk. This is important especially if you are wrong about Ford and the stock price drops to $8 during that period. With the stock purchase you would be losing $598, but with the option purchase you would have only lost $69.

This example shows how options trading strategies can prove to less risky than owning stock outright. Call options are great investments to own if you think the price of a stock will rise in price and you don’t have a lot of money to invest.


 

Options Trading Course

Save

January 2, 2021 Update: We have just announced our BEST STOCK NEWSLETTER of 2020 AWARD!

CLICK HERE to find out which stock newsletter was up 78% in 2020 (and whose 2019 picks are now up 113%).

*** Our Award for BEST STOCK NEWSLETTER of 2020 ALERT ***

Updated January 2, 2021

At WallStreetSurvivor, we subscribe to dozens stock recommendation and advisory newsletters. There is ONE newsletter that is constantly outperforming all of the others--The Motley Fool Stock Advisor.

Five of their 2020 stock picks have doubled and the average return of all 24 of their stock picks for 2020 is up 78%!

We have been tracking ALL of the Motley Fool stock picks since January 2016. That's 5 years and 120 stock picks. As of Friday, January 1, 2021 the Motley Fool's January stock pick (TSLA) is up 720%, their March pick (ZM) is up 172%, their April pick of SHOP is up 226% and their June pick CRWD is up 120%; and another two have more than doubled. In addition, 10 of their 2019, 12 of their 2018, 11 of their 2017, 15 of their 2016. Most impressively, over the last 5 years that we have been tracking every recommendation, their average stock pick is up 209%--tht means over the last 5 years their stock picks, on average, have TRIPLED!

Now no one can guarantee that their next picks will be as strong, but our 5 years of experience has been super-profitable. The important thing about the Fool stock picks is you have to buy them the day they are recommended because they usually pop 5-10% in the first 72 hours after the release their recommendation. You sure don’t want to risk missing out on their next pick.

Normally the Fool service is priced at $199 per year but they are currently offering a NEW SUBSCRIBER DISCOUNT that allows you to get theiir next 24 stock picks for just $99/year. HERE is the LINK to visit their New Subscriber Discount page.

CLICK HERE to get access to all The Motley Fool’s Stock Picks and their next 12 months of picks for just $99 per Year! 



GET UP TO $1,000 IN FREE STOCK

WHEN YOU OPEN A ROBINHOOD BROKERAGE ACCOUNT

Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.

Here’s the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.

Claim your free stock NOW (before it’s too late)



Comments are closed.