Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. There are 11 references cited in this article, which can be found at the bottom of the page. An option is a contract that says you have right to buy or sell an asset at a certain price at any time before a certain date, but you’re not obligated to do so. Options are separated into “call” and “put”. With a call option, you have the right to buy an asset at a certain price before a given dat.
You’d buy this option if you expected the value of the asset to rise before that date, so that you could buy it more cheaply. A put option is the opposite. An option, just like a stock or bond, is a security. Understand the risks of options trading. Options can be purchased speculatively or as a hedge against losses.
Speculative purchases allow traders to make a large amount of money, but only if they can correctly predict the magnitude, timing, and direction of the underlying security’s price movement. This also opens up these traders to large losses and high trade commissions. Read and understand the booklet entitled “Characteristics and Risks of Standardized Options. This booklet was written in compliance with the SEC regulations. Brokerage firms distribute the booklet to those who open an options-trading account. Understand the basic types of trades.
There are two major types of options trades: calls and puts. Both represent the right to either buy or sell a security at a certain price within a defined time period. A “put” is the option or right, but not the obligation, to sell an asset at a certain price within a specific period of time. The purchaser of a put expects the price of the underlying stock to fall during the term of the option. You can open a position with the purchase or sale of a call or put, close it by taking the contrary action, exercise it, or let it expire.