Options are conditional derivative based contracts that allow buyers of the contracts (option holders) to buy or sell a security at a chosen price. Option buyers are charged an amount called premium the sellers for such a right. Should market prices be unfavorable for option holders, they will let the option expire worthless, thus ensuring the losses are not higher than the premium. In contrast, option sellers (option writers) assume greater risk than the option buyers, which is why they demand this premium.
Options are divided into "call" and "put" options. With call options the buyer of the contract purchases the right to buy the underlying asset in the future at a predetermined price, called strike price. With a put options the buyer acquires the right to sell the underlying asset in the future at the predetermined price.
Why use options?
Investors use options for different reasons, but the main advantages are:
- Buying an option requires a smaller initial outlay than buying the stock.
- An option buys an investor time to see how things play out.
- An option protects investors from downside risk by locking in the price without the obligation to buy.
Now if you're asking yourself, "well aren't options risk?" - Of course they are but so is every single other investment: stocks, forex, futures etc. It's all risky but it's how you handle the risk that makes all of this either work for you or against you.
You also can limit your exposure to risk on stock positions you already have. Let’s say you own stock in a company but are worried about short-term volatility wiping out your investment gains. To hedge against losses, you can buy a “put” option that gives you the right to sell a particular number of shares at a predetermined price. If the share price does trade lower, the option limits your losses, and the gains from selling help offset losses.
So really, when you buy a call (betting price of a stock goes higher) or buy a put (betting that the price of the stock goes lower) your risk is limited to the amount you pay for the options.
If you are a beginner and want to learn to trade options then let's start with directional options.
The video you just watched is one strategy of trading options and, in our opinion, is usually the easier strategy for beginners learning how to trade options. Now the thing to remember when you're learning about options trading is that you'll hear the term 'advanced options' thrown around all the time.
Names like: Iron Condor, Verticals, Butterflies....you'd almost think you were in a Science class hearing it. The key here is to not confuse this with them being 'better' strategies. They're more complicated to trade and the upside is limited on what you can gain. In fact, in this blog lesson we're not even going to dive into those because it's too much. As a beginner options trader learning to make money with one strategy is the key to start. Once you can do that consistently then maybe consider other strategies, but hey, if you're making money with one strategy why would you switch?
We discuss some of these advanced strategies in our Advanced Options Course. It's very in-depth, close to 20+ hours of video lessons. Why? Because when you expand your options knowledge the strategies expand so it takes a little longer then just buying or selling a stocks. However, the rewards from options trading can be phenomenal.
We can continue the lessons here and look at another directional options strategy. One that made $2,000 by purchasing Google call options.
You can actually read more about this trade in another blog post on it here.
Well, the answer is that most asset classes do including: Futures, commodities, penny stocks and even ETF's. So let's assume you think gold is going higher for whatever reason. You can go out and call that 800 number you see at 1am on the TV and get that rare gold coin, buy gold futures or even gold miners. Or, you could buy a gold ETF like GLD. But, let's take it a step further....let's say you're a little unsure now and don't want to buy that much, well, you can use call options.
This is something that one of the Landshark Coaches did but with the SPY ETF (S&P500) when the market was selling off violently. Now most investors want to sell when the markets are red and buying can bring doubts so we can mitigate risk by using call options which he did. Below we're going to watch our final video lesson on SPY call options where this trade cleared close to $4,000 in Gains.
There are a few next steps we would suggest.
1. Register for a 60 Day Guest Pass
2. Take this Free Class from the CBOE - This is REALLY basic but it's going to give you some foundation blocks. You're not going to learn how to actually trade with any profitable strategies...we're going to show you that in our courses...but start here and get some more knowledge.
Remember, when you're learning to trade options as a beginner to take it slow and pick one strategy to start with. If you don't want to spend five years trying to figure this out on your own then let us help you get there faster by enrolling in an options course.
You can schedule a call with us here to learn more about the courses & expectations.