Puts and Calls
How do You Make Money Trading?
Related Terms:
Basics:
These are examples of derivative securities that you can buy and sell through most online brokerage platforms. For the beginner options trader, think of calls as securities that allow you to make a bet that a stock or index price will move UP past a certain level in the near future. And think of put options as securities that allow you to make a bet that a stock or index price will FALL below a certain level in the near future.
Trading is always cheaper and potentially more profitable on a percentage basis than buying or shorting the stock itself. So if you are absolutely sure that the price of a stock or index will move a lot in the near future, then it is always more profitable to trade. You will always get a higher percentage return on your investment trading them, provided the stock or index moves as much as you expected in the time period that you expected.
This is why there is so much volume on options on a stock during the few days before the company releases their earnings. Traders know that surprise earnings releases can be extremely profitable if the correct trade is made prior to the earnings release.
For the more experienced trader, these can also be used to lock in profits, hedge other stock or index positions, and they can even be used to add income to your account in flat or sideways moving markets.
Trading Tip:
Before you get too excited about trading, please consider one very important--but not too obvious--trading tip. Most beginning traders make a critical mistake--they think that when they trade that they have a 50% chance of guessing the future direction of a stock movement. They think it can either go up or it can go down.
But they are WRONG--Stock prices can also stay the same!!! So when you are making bets that there will be a big movement in the price of a stock, and the stock price sits there unchanged, you can lose your entire bet.
Break Down
Trading isn’t just about trading stocks, traders have more investment choices than they realize. Stock choices are other ways to make money. The stock market fluctuates like a roller coaster. Sometimes it is up, down, sideways, upside down, or just the same. Traders are given the choice to buy or sell security. Security is stocks, indices, commodities, and many others. These choices are divided into the two categories. One increases in value when the security is going up, and goes down in value when it is declining, and the other is the opposite. So when you set your bets, you have other investment opportunities that allow you to profit from the movement of the market.
It gets tricky when these choices expire. When you haven’t sold when the expiration date comes, you will lose that entire investment. This can be a little bit scary but through careful planning and strategy, as with anything else, you can really turn a nice little profit. Take caution and keep an eye on the expiration dates. These choices aren’t just for institutional investors, anyone can take advantage of these great tools. Keep learning and expand your investment goals so you can make sure you are getting the most out of the market.
To learn more about how to make money trading, keep reading:
- If you think a stock price is going up, buy a call option
- If you think a stock price is going down, buy a put option
- If you think a stock price is staying the same, write a call option
Here are the top 10 option concepts you should understand before making your first real trade: