Options are higher risk futures that you can buy and sell against stock you own or don’t own. Investors have made and lost fortunes trading options. How do you become rich? Jim Cramer made enough in one options trade to quit Goldman Sachs and start his own hedge fund.I only want to mention it briefly because it can be a powerful tool as a hedge or even to add gains on stocks you already have.
There are 2 types of options in stock markets which is what I’ll be focusing on. They are calls and puts and you can either buy or sell them. There’s an easy way to remember what they mean by associating common phrases to them. You buy a call when you think the price of something will go up. So just like you "call up" a friend, you buy a call when you think the price of a stock or ETF will go up. Selling a call gives you instant cash that you keep as long as the stock price stays the same or goes down (the opposite of buying a call). A put is the exact opposite. You buy a put when you think the price of something will go down. So just like you "put down" a friend, you buy a put when you think the price of a stock or ETF will go down. Selling a put gives you instant cash and you keep it as long as the stock stays the same or goes up (the opposite of buying a put). As if this isn’t confusing enough, options come with expiration dates. You’re free to buy and sell until the expiration date but on the expiration date, 2 things can happen. One, your option can be exercised for stock shares with you making some profit and now owning shares of the stock. Regular stock trading strategies apply then. Two, your option expires worthless and you lose all your money!
This can be tricky to comprehend at first but you’ll get used to it after some thought and additional study. Trading options on individual stocks is very time consuming. For most people, I suggest only trading options against ETF’s or selling options on stocks or ETF’s you already own. For example, if you think the economy will crash then you can buy some calls on an UltraShort or Bear fund. Not only does this strategy require less capital upfront but it doesn’t require too much research. The best part is that you just need a feeling on the overall direction of the market to profit. You can also sell calls on stock you already own and pocket money every month if you’re right. This is a very complex subject and I will be going into more detail on how to make money in this area in my subscribers only area. I only want you to be aware of its existence. It’s never a bad idea to invest a little play money in options but be advised that you can lose your whole investment very easily, so tread lightly. On the other hand, if you hit a home run, you’ll be telling your friends about it for years. It’s not uncommon to make thirty to one hundred percent on your money trading options but the stress and heartache is sometimes unbearable. Options can help you acheive financial indepenedence faster than any other method.