Make Money Trading Stock Options
An option gives you the right though not the obligation to purchase or sell a contract in the future at a fixed price.
Consider the stock options (how do stock options work) that many people are offered in of their employment contracts. If your company gave you the option to buy a thousand shares at the price of $6 a share within 18 months, you could still purchase the shares at the $6 price even if, in 12 months' time, the price had risen to $7. Therefore, you would make a saving of $1 per share, or $1,000 if you chose to purchase the entire thousand you were offered.
Or, if the price had dropped to $5 a share, you wouldn't be obliged to buy the shares, which were offered to you at a higher rate.
Many investors use options as insurance in case an event happens to the detriment of an existing position, the key benefit being that when you purchase an option, the maximum liability of the trade is known from the outset.
Options fall into two categories - calls and puts. A call option is the right to buy an underlying instrument at a certain price, as in the share options example above. A put option is the right to sell an underlying instrument at a certain price. Options expire at a set date, so they must be closed on or before the expiration date.
In addition to purchasing puts and calls (opening long positions), you can sell them (open short positions). When you purchase an Option CFD your risk is restricted to the cost of the option multiplied by your trade size. However, when you sell an option CFD your risk is unlimited.
For instance, if you thought the FTSE 100 was overvalued at its current level, you could purchase a put option to profit from a potential correction in the market, as this would give you the right to sell the option at its inflated price.
If the FTSE is trading at 5800, you could purchase a put option with a 'strike' price of 5700, believing that the market goes down below 5700 before the expiration date of your option. If you purchase one contract of your put option at a price of 30, your risk on the trade is GBP300 (30 x GBP10 = GBP300).
If the FTSE then closes at 5500 on the day of your option expiry, you would make a profit of GBP1700 on your trade. This profit would be the calculated as the difference between your strike price and the settlement price, less what you paid for the option and multiplied by your trade size (5700 - 5500 - 30 = 170, 170 x 10 = GBP1700).
Consider the stock options (how do stock options work) that many people are offered in of their employment contracts. If your company gave you the option to buy a thousand shares at the price of $6 a share within 18 months, you could still purchase the shares at the $6 price even if, in 12 months' time, the price had risen to $7. Therefore, you would make a saving of $1 per share, or $1,000 if you chose to purchase the entire thousand you were offered.
Or, if the price had dropped to $5 a share, you wouldn't be obliged to buy the shares, which were offered to you at a higher rate.
Many investors use options as insurance in case an event happens to the detriment of an existing position, the key benefit being that when you purchase an option, the maximum liability of the trade is known from the outset.
Options fall into two categories - calls and puts. A call option is the right to buy an underlying instrument at a certain price, as in the share options example above. A put option is the right to sell an underlying instrument at a certain price. Options expire at a set date, so they must be closed on or before the expiration date.
In addition to purchasing puts and calls (opening long positions), you can sell them (open short positions). When you purchase an Option CFD your risk is restricted to the cost of the option multiplied by your trade size. However, when you sell an option CFD your risk is unlimited.
For instance, if you thought the FTSE 100 was overvalued at its current level, you could purchase a put option to profit from a potential correction in the market, as this would give you the right to sell the option at its inflated price.
If the FTSE is trading at 5800, you could purchase a put option with a 'strike' price of 5700, believing that the market goes down below 5700 before the expiration date of your option. If you purchase one contract of your put option at a price of 30, your risk on the trade is GBP300 (30 x GBP10 = GBP300).
If the FTSE then closes at 5500 on the day of your option expiry, you would make a profit of GBP1700 on your trade. This profit would be the calculated as the difference between your strike price and the settlement price, less what you paid for the option and multiplied by your trade size (5700 - 5500 - 30 = 170, 170 x 10 = GBP1700).