2 ways to make money by options trading
Investing money is nothing new. People have been doing this since the dawn of time. What you choose to invest in can have a big influence on how much return you make on your investment. If you opt for options trading via the stock market, you can work to build your net worth while developing industry knowledge. Options trading is a great place for beginners to start when it comes to stock market investments. If you’re wondering “can i make money trading options“, the answer is that you sure can.
The Basics Of Options Trading
If you’ve looked into options trading at all, you likely know that an option is a contract. It gives you the ability to buy or sell through a specific date in the future at a particular price. The big terms to be aware of when getting involved with options trading are call and put.
What Is A Call Option?
A call option is a contract that allows you to exercise the right to buy stocks in the future. Your contract will state at what price you can buy the stocks at on a per stock basis. Call always refers to buying when it comes to stock market terminology.
What Is A Put Option?
A put option is a contract that allows you to exercise the right to sell a stock in the future. The options contract will specify the price at which you can sell each stock on a per stock basis. When it comes to stock market terminology, put always refers to selling.
Making Money With A Simple Call Option
When you’re first starting out in the options market, it’s a good idea to opt for a simple options trading strategy. In the event that you believe a public corporation’s stock is going to increase in price in the near future, you’ll want to buy a call option. This will give you the ability to buy stocks in the future at a specified price.
Let’s look at an example to make this point easy to understand. You believe company XYZ’s stock is going to rise within the next few weeks. You purchase an options contract where you can buy the shares at a value of $5.00 per share. The current price of the stock is $4.00 per share. Your contract expiration date is 30 days from now.
If 20 days from now XYZ stock is up to $8.00 per share, you can exercise your call option. This allows you to purchase XYZ stock shares for $5.00 each. Then, you can immediately resell them on the stock market for the going rate of $8.00 per share. This will net you a profit of about $3.00 per share after trading fees are taken out.
Making Money With A Simple Put Option
Making money with a put option is fairly easy to do if you can determine the future movement of a company’s stock. Remember that a put option gives you the ability to sell a stock in the future for a specified price. With this type of contract, it doesn’t matter what the current market price is for the stock at the time you sell it. You’ll get paid the amount you agreed upon in your options contract.
To make money with a simple put option, you’ll need to identify which public corporation’s stock is going to decrease in the near future. You’re basically betting that the stock price is going to plummet so that you can make money. Let’s look at an example of this type of options contract so that you better understand how to profit from it.
You believe that company ABC’s stock price is going to go down over the next few weeks. You purchase a put option that allows you to sell their stock at $5.00 per share. The current market rate of ABC’s stock is $4.50 per share. Your put option has an expiration date of 30 days from now.
Let’s say 28 days later, the price of ABC’s stock plummets to a low of $2.00 per share. You can exercise your put option to make money. You’ll first want to buy the number of shares that your put option is for. In most cases, each option will be for 100 shares of stock in the company. Once you purchase those 100 shares at the current market value of $2.00 per share, you can exercise your put option. This allows you to resell the ABC stock at $5.00 per share. That’s a profit of about $3.00 per share minus the involved trading fees.
Making money with options trading isn’t too difficult to do as long as you understand the basics explained above. Once you get good at basic call and put options, you can move on to more advanced options trading strategies to grow your income.