Basics of stock options

Stock options are a great way to reduce risk in trading or to leverage your capital. While advanced stock option strategies are only for experienced investors, basic option strategies can also be used by novice traders.

Basically, a stock option is nothing complicated. There are just a few things to consider. There are two basic types of options which are the call option and the put option.

The call option (put) gives you the right to buy (sell) a share at a fixed price before a certain date, the expiration date. The option expires on this date and is no longer traded. Until this date, your strategy should have worked, otherwise your stock option expires worthless.

Buying the stock option is nothing more than buying the stock itself. It’s just that you need a lot less money to buy the option instead of the stock, and that the option expires in one day. But the rest is almost the same. When the stock moves, the option also moves.

The difference and the big advantage of options is the leverage involved. To buy the option, you need about 10% of the capital that would be needed to buy the shares outright but with the same profit potential. There is the risk too.

One option contract is equal to 100 shares. If you want to own 1,000 shares of Microsoft, you can buy all 1,000 shares on the stock exchange or buy 10 Microsoft option contracts on the options exchange. You will discover that there are many options for an action. The reason is that options have different expiration dates and strike prices. The strike price is the price at which you could buy the shares if you wanted to.

In practice, you don’t want to buy the stock through the options, so it’s still a theory. Most options are not exercised, but are sold before expiration at a profit or otherwise expire worthless. So the option is just a bet with a limited investment. You can never lose more than the purchase price of your option with basic option strategies.

There are various combinations of covered and uncovered call and put options. Different strike prices and expiration dates have different option prices, leverage, and risks. To learn basic options trading strategies, you must first explore the possibilities of simple call and put options.

Instead of a short sale, you can buy a put option. Instead of going long on stocks, you buy a series of buy contracts. Following option prices over several days will show you that the option price is slowly decreasing, even though the stock price hasn’t changed at all. This is the price you pay for leverage.