Options:

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Low risk Stocks and Options trading:


Many people say that options are risky, and that can be true depending on how a trader plays them. If you buy an options contract, you could potentially lose your entire investment. Sounds scary, but it is really no different than buying any stock, then deciding how much you are willing to tolerate regarding price drop.


I always have and idea of how much I am willing to lose when I buy a stock. Many times, I set a sell stop right after purchasing a stock. That protects capital and limits my risk.


When I buy an option, the entire cost of my options contracts could be lost. Therefore, I make sure that my total cost of the contracts is no more than I would normally tolerate when setting a sell stop.






Options explained:


I don't like to spend money before I have made it. For that reason, I will only cover the types of options trades that don't put large amounts of borrowed money at risk. Those being: Buying Calls, Buying Puts, and Selling Calls.


There are many complex explanations for options. Mine is basic and complete


For every option contract, there is a Seller and a Buyer (sellers are sometimes called writers)


Each contract covers control of 100 shares of stock.



When to buy


You buy Call options when you think the price of X stock will rise above Y dollars per share by Z date.


You buy Put options when you think the price of X stock will fall below Y dollars per share by Z date.


You sell/write Call options contracts when you already own 100 (or more) shares of X stock and you think the stock price will NOT rise above Y dollars per share by Z date.


If you are correct in your thinking, then you make money.


  X is a stock symbol such as GOOG
  Y is the price per share such as $624.00 – referred to as the “Strike” price.
  Z is the expiration date – options expire once per month.




The result:


After you buy an option, it will show up in your portfolio just like a stock does (the symbol will be different). The value of the option will move up or down during the course of each day, and you can sell the option any time you like via Market, Stop, Limit orders or any other orders allowed by your broker. (by USA rules)


Expiration:


If the stock price has not gone the way you thought, your option contracts will expire worthless. The option remains “out of the money” at expiration.


If you are showing a profit on your options, referred to as “in the money”, and you choose to keep the options until expiration, you must either sell or exercise the option before its expiration. This means...


If you bought call options, and the stock price is well above your strike price, you can purchase 100 shares of stock for each option you own at the strike price.


If you bought put options, and the stock price is well below your strike price, you can sell 100 shares of stock for each option you own at the strike price.


If you sold/wrote call options, and the stock price has not exceeded the strike price, then you keep your stock and keep the premium paid by the buyer.



A detailed explanation with examples of each to appear in later posts.

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