so @ctsshah mentioned to me people might be interested to know a couple different ways to trade #opt

• 08/08/21

so @ctsshah mentioned to me people might be interested to know a couple different ways to trade #options in the market as i recently posted about my #earningsplay strategy called a straddle... now this strategy can sound complicated if you're not familiar with how to trade options, but truth be told its super easy once you learn the ropes...so let me start at the top and explain what options are and how to trade them effectively... OPTIONS FOR BEGINNERS options can be used as a strategic way to buy 100 shares of a stock you want to own for a cheaper price or as a means of income trading. they come in calls(long) or puts(short), and you can buy or sell either one. options are just a contract that gives you the RIGHT to buy or sell a stock or other underlying security (but NOT the obligation) — usually in bundles of 100 — at a pre-negotiated price by a certain date. however, when that date arrives, you’re not obligated to buy or sell the stock. you have the OPTION to let the contract expire, hence the name. when buying options, you’ll pay what’s known as a “premium” up front, which you’ll lose if you let the contract expire, unless you already own 100 shares of the stock and sell an option contract in which case you'll collect a premium. now remember, each contract represents 100 shares, so the price you see on the premium quoted or credit given (depending on if you're buying or selling calls/puts) will be multiplied by 100 when you buy/sell your desired contract (dont forget this).... so, say you think stock ABC is going to go up soon and you're almost certain of it. you'd want to buy a call option (going Long) on ABC at or BELOW the strike price (strike price is what you'll pay per share if you exercise your contract) with potentially unlimited upside while limiting your risk to only the premium you paid as potential loss. now say you own the 100 shares already, you can sell covered calls/puts to mitigate and limit risk, with less potential upside gains (will have to explain in another thread). the opposite is true of you think the stock might tank... you'll want to buy a put option (shorting) or sell a covered call if you own the 100 shares and collect the premium upfront. a put option gives you the right to sell a company’s stock at an agreed upon strike price before its expiration. (more later)... once you buy the contract, a few things can happen from the time you purchase it to the time of expiration. you can either exercise the option, meaning you’ll buy or sell shares of the stock at the strike price, you could sell the contract to another investor (most likely your #1 choice /goal), OR you could let the contract expire and walk away with no further financial obligation. now i know this sounds confusing as hell so let me give you some basic examples of both a call and put option contract, assuming you DONT own 100 shares yet... let’s say a company’s stock is currently $50 per share. You could buy a call option to buy the stock at $50/share (the strike price) that expires in six months, for a premium of $5. Premiums are assessed per-share, so this call option would cost $500 ($5 premium X 100 shares). Note that when buying options, you’ll choose from an available list of strike prices, and it doesn’t have to be the same as the current stock price. If the stock price remains at or drops below $50 during the six-month period and never recovers, you could let the contract expire worthless, and your total loss would be the $500 you spent on the premium. That $500 is also the maximum amount you could lose on the investment. Now let’s say the price rises to $60. You could exercise your option to buy the 100 shares at the strike price of $50, then turn around and sell them at $60. In this instance, your return on investment would be $500. (It would cost $5,000 to buy the shares, but you would sell them for $6,000 for a gain of $1,000. Subtract the cost of the premium, and you’re left with $500 profit.) When buying a call option, there will be a breakeven point at which you’ll earn a profit (strike price + premium paid) In this example, that breakeven point is $55 ($50 strike+$5 premium). So, if the stock is trading between $50 and $55, you would be able to recoup some of your investment, but it would still be for a loss (stock needs to rise ABOVE your strike price for call options)... If the stock price does rise above the strike price, the contract itself gains intrinsic value, and the price of the premium will rise accordingly. This means you could sell the contract to another investor before expiration for more than you bought it for, taking a profit (#1 way traders use options). You’ll have to look at several factors to determine whether you should sell an options contract or exercise it, but most traders set a profit percentage goal and sell when they hit it... WHEEEEWWW that was long... hope you're not too confused but that's the beginners guide for options trading by meeeeeee with a little help from nerd wallet to explain lingo... heres the article if you want more info... theres so much more to options trading to know before you jump in head first, and if enough people want more info i can go into the strategies i use daily to turn major profits or even to hedge against a downturn or market crash.... THANKS FOR READING 😎 https://www.nerdwallet.com/article/investing/options-trading-101

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