If you’re scratching your head wondering what the heck covered put writing is, let alone what an option is, then we need to give you an understanding the basics of Options Trading so you can create a solid trading foundation.
Consider the following as a brief Stock Options 101.
An options contract, more commonly referred to as simply options, are financial contracts for an underlying asset between two parties. Think of them as a derivative of a stock, much like ketchup is a derivative of tomatoes and wine is a derivative of grapes.
This contract gives you the right, but not the obligation, to either buy or sell an underlying asset at a set price, on or before a certain date. Unlike stocks, since it is a contract, it will expire on a specified expiration date. This means you don’t tie up your account with stock ownership.
With stocks, Warren Buffet says it best:
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Options give you options. Buying a stock gives you a long position so you are limited to trading in one direction, up. With options it doesn’t matter if the stock is trading up, down or sideways, you can profit in any market condition using specific strategies.
Options are a great way for traders who have smaller account sizes to trade well-known stocks as they allow you to leverage your account. With stocks, you buy each individual stock per share whereas with options you enter option contracts which control 100 shares per contract. And these contracts are a fraction of what the actual stock costs.
There are 2 types of options: call options and put options. Calls for if you think the stock is going to trade up and puts if you think the stock is going to trade down. You can either buy or sell calls or puts.
The total cost (the price) of an option contract is called the premium. This price is determined by a few factors, including:
- stock price
- strike price
- time remaining until expiration (time value)
With this versatility, you’re probably wondering if you can make a living trading options?
Yes, you most certainly CAN make a living trading options. In fact, many people trade options on either on a part time or full time basis and there are many traders who only ever trade options.
To learn more about options and how to make a living trading, register for Trading U and join Wealth Builders HQ founder, Robert Roy, as he shows you how.