Options

An Option is a contract that gives the owner the right, but not the obligation, to purchase stock at a set Strike Price on or before the expiration date of that contract.

Options are short term strategies. The object is to purchase the contract low and sell high before the expiration date which is the 3rd Thursday of the Month (except for Holidays) for the month you exercise.

You purchase Call Options when you think the stock's price is going to rise and Put Options when you think the stock's price will drop.

Trading Options is the way to get leverage in the stock market. For example, you think stock XYZ which is currently trading at 34 dollars will soon be trading at 37 dollars. You can purchase the stock at $32 and sell it at $37 for a profit of 15.6%. However, you could buy the $35 call option (which is the right to buy the stock at $35 for a given time) at $.70, this way if the stock moves up to $37 the $35 Call Option you bought could be worth $3, making a profit of 328%. Wait, think about that for a second, would you rather get 15% return on your money or 328% return, hmmm..., if your still thinking stop, you want 328% return on your money (at least for most people).

What if you are just starting to invest and are looking to be creative with a stock you own. There is a strategy just for you! It is called Covered Calls .

We have been talking about short term strategies. What if you want to trade for the long term? Check out this link for Leaps.

Naked Put is another way to use Options. Trading Options may result in a powerful return. They can also have powerful consequences for inexperienced traders. Avoid not being prepared, have a stop loss, know your exit, buy enough time, trade with the trend and take your profits the first sign of weakness. Develop a system to trading them and test them, paper trade my friend.

To learn more about how stock options work click here

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