Investors on Wall Street not only make profits via trading stocks but via trading options as well. Learn exactly what options are and what an options trading strategy is below.
What is a Stock Option?
A stock option is where you can buy or sell an underlying asset at a pre-negotiated price by a specific date in the future. This can provide knowledgeable investors with the ability to gain profits even when the stock market is going down. It can also be used to limit their losses if their stock investments are trending lower.
What is an Options Trading Strategy?
An options trading strategy is where an investor will employ a specific strategy utilizing options in an effort to boost their returns from the market. There are several strategies to consider.
The two main vehicles when it comes to options: calls and puts. Calls enable you to buy a stock’s shares at a predetermined price (known as the “strike price”) within a specific period of time before the expiration date on the options contract. Conversely, puts enable you to sell a stock’s shares at a stated price before the expiration date on the options contract.
Whether you utilize calls, puts, or both depends on what you think that stock’s price will do – increase, decrease, or stay relatively stable. If you think the price will increase, buying a call option and selling a put option will benefit you; if you think the price will decrease, selling a call option and buying a put option will benefit you; if you think the price will stay stable, selling either or both of a call option and put option will benefit you.
