This pandemic is more than just a health concern. The social and economic impacts are also quite devastating. Many people were laid off from their jobs. Entrepreneurs lost their businesses. Stock market investors watched in horror as the stock market crashed at an unprecedented speed in the global financial market history. During this time of extreme uncertainty, what do you do if you are an investor? The good news is that there is still a way for investors to earn money despite all these uncertainties. And that is through Stock Options. Stock options is a way to earn amidst a crisis.
What are Stock Options?
Stock Options are actually contracts. They are contracts that allow the investor to buy or sell shares of stocks at a predetermined date, at an agreed upon price. Although investors have the right, they are not obligated in any way to buy or sell the shares.
Types of Stock Options
There are two kinds of stock options, the Call Option and the Put Option. While call options give the investor the right to buy a stock, a put option gives the investor the right to sell the stock.
Think of the call option this way. Let’s say you want to buy a car. You already found the perfect car but you don’t have money to pay the full amount for the car yet. So, what you should do is to give earnest money.
An earnest money is a deposit made to the seller to hold the car in reserve for you for a certain period of time. Because of your agreement with the seller, the seller cannot sell the car to any other person during the period of the contract. You on the other hand were able to buy time to raise the money. The earnest money gave you the leverage to control the sale of the car during the period of the contract. So, even with a price increase, you as the buyer can still purchase the car at the agreed price.
From an investor’s point of view, a call option works in a similar manner. Although you don’t own the stock itself; by owning a contract, you have control of the stocks. What you have is leverage. With one contract, you can control 100 shares of stocks without paying the full value of the stocks.
2. Put Option
The put option on the other hand works like an insurance. Let’s say you bought insurance for your newly-purchased car. You paid a small amount or a premium to have your car insured to cover damages for a fixed amount called the coverage value. If by chance your car gets damaged or stolen, the insurance will then pay for damages amounting to coverage of your insurance. Thus, the insurance served as financial protection. Similarly, if an investor wants to protect his/her portfolio, the investor then buys a put option to protect the stocks from future drop in market prices.
Although there are many strategies in trading stock options, hedging is one of the strategies used to lessen the risk of the investment. In finance, to hedge means to offset the chance of a particular investment in losing its value. The Hedge Strategy in Stock Options is a good way to earn money even in a pandemic.
In stock options trading, a trader buys a call option if there is a future expectation of an increase in stock prices in a given time. On the other hand, a trader buys a put option if there is future expectation of a decrease in stock prices at a given time.
If the trader is not sure of whether the stock will go up or down, it is possible to buy both call and put options at the same time as a hedge strategy.
Parts of an Option
Each option contract has the following components:
1. Underlying Asset
Since option is a derivative, meaning something that is based on another thing, all options contracts have an underlying asset. The asset can be a stock, an index or an exchange-traded fund.
2. Size of Contract
Each option contract is equivalent to a certain number of shares. Each stock exchange varies in number as far as contract sizes are concerned. If you are trading in the United States, each option contract is equal to 100 shares per contract.
3. Expiration Date
All options contracts have different expiration dates. The expiration date is the day where the option to buy or sell is supposed to be exercised. There are contracts that are as short as a week while others can last longer than four months. The standard is a monthly contract that typically expires at the third Friday of the month.
4. Strike Price
The strike price is the price where the contract can be bought or sold. In layman’s term, it is similar to a target price.
The premium is the price to be paid by the buyer for a stock options contract. The premium is basically the price of the contract.
With Stock Options trading, you don’t need to worry about the market going down because there is a way to earn a profit regardless of market direction. There is also no need to wait for months or even years to get possible returns because there is a way to earn profits in less than a week’s time.
An investment in knowledge pays the best interest. When it comes to investing, nothing will pay off more than educating yourself. Do the necessary research, study and analysis before making any investment decisions.– Benjamin Franklin
Whether you are a seasoned investor or a newbie, stock options trading is a good investment alternative especially during difficult economic times. But before you open your trade account and start trading, just know that like any other investment vehicles, stock options trading is not without risk. Thus, it is highly recommended that you read and learn more about stock options trading.
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