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buying stock options

A Quick Guide to Buying Stock Options

6 May 2017 • Senza categoria

So you’ve decided to invest in the stock market. Congrats!

Now that you’ve come to this decision, you’re probably scratching your head, wondering which stock-buying strategy to use.

Not to mention, the stock language is pretty overwhelming. What’s strike price anyways?

Well, this quick guide to buying stock options can help you out with that.

In it, you’ll learn:

  • 3 Basic strategies for buying stock options
  • Common stock market terms so you can speak Wall Street
  • And, a handful of know-hows when it comes to buying and selling stocks

Read on to learn more!

Common stock market terms you need to know

Options

Options are contracts that give investors just that—options. One of the options is buying the stock at a certain price by or prior to a specific time period.

If you want to get technical, this is a call option.

The other option is similar except, instead of buying the stock, you’re selling it. This is known in the stock market world as a put option.

Since these choices are options, you’re not obligated to do one or the other.

Strike Price

The “certain price” we’re talking about above is known as the strike price.

In other words, the strike price is a set price.

It’s also a key factor for investors to determine if they’re making a profit.

In fact, you can use it to determine your break-even point. This is the amount you would need to make to not loose money. But you also wouldn’t be making more.

Price Premium + Strike Price = Break-Even Point

Option Premium

The option premium is based on intrinsic and extrinsic value.

To better understand this, here’s an example.

You have a call option at a strike price of $50 per share. You have 100 shares (since this is the norm). The option premium is $6.

The option is currently trading at $54 a share. This is $4 above the strike price.

So, the $4 of the option premium is the intrinsic value. The $2 that is leftover is the extrinsic value.

Strategies for buying stock options

There are several stock option strategies. But, according to a Nasdaq article, some of the most common and straightforward strategies are these…

Wait until they’ve matured

Essentially you hold the call option until the contract is up. (Note: this is before it expires.) And then you trade it.

Trade before the contract is up

When TV shows and movies capture the stock market, they normally depict some form of this strategy.

Let’s say you have a call option that has a strike price of $40 per share. Recently, it’s risen to $60 per share. You expect this is the highest this share will rise. So, you trade it.

Which should bring you some profit (minus the premium and commission).

Allow it to expire

Perhaps the share you bought never went up or down. You’re still waiting but nothing is happening.

At which point you let it expire. You’ll have to pay the option premium and commission.

Advice for buying stock options

Here’s some universal advice when it comes to buying stock options:

  • Buy when they’re low; sell high
  • Think twice about risky stock options if you’re towards retirement. Yes, there’s potential big profit. But potential big profit loss.
  • Predict trends by studying filings
  • In general, think marathon, not sprints

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