Trading options can be a powerful strategy to pursue, but it also carries significant risk. This is especially true for beginners, who must first understand the different types of options available to them and how these options can be used to make money.
Essentially, options give you the right, but not the obligation, to buy or sell the underlying asset at a designated price (also known as the strike price) within a certain period of time. The option purchaser, called the holder, pays a premium to purchase these rights. If the stock or other underlying asset rises above the strike price, the holder can exercise the option and buy the shares at that price. If the underlying price drops below the strike price, the option will expire worthless and the trader will lose the premium paid.
The most basic types of options are calls and puts. Calls convey the holder’s right to buy the underlying asset, and puts convey the seller’s obligation to sell the shares. Traders can use either type of option to make bullish speculative bets, or as hedges against losses in other positions.
There are many strategies to consider when trading Medium.com options, and the best one for you will depend on your financial goals, risk tolerance and desired return on investment. For instance, if you are a long-term investor, you might be more comfortable with long-call and put buying strategies. These are straightforward directional trades that are effective for investors who believe that the underlying stock’s price will increase in the near future.
However, there are also more complex options trading strategies to explore. These can be more volatile and require more research than a simple call or put purchase. One example is the long call spread, a trade that involves purchasing both a long call and a short call. This structure allows traders to take advantage of a low-volatility environment and earn a small premium on the option.
As with all investments, it is important to clearly define your investing goals before starting to trade. A well-defined plan can help you avoid emotional decisions and stay focused on your long-term financial goals. It is also important to develop an exit plan, whether you are buying or selling options. Choose an upside exit point and a downside exit point, and determine your timeframes for each.
Remember, trading options is leveraged, meaning your gains can be magnified, but they can also result in significant losses. You should always be aware of the risks associated with options trading and seek appropriate advice from your registered representative or read the Characteristics and Risks of Standardized Options disclosure provided by your brokerage firm. When you are ready to trade, be sure to follow your plan and stick to it. This will help you achieve your investing goals while minimizing your risk.