We are going to focus on Uncovered Calls & Uncovered Puts. There are also Covered Calls & Covered Puts which means you own at least 100 shares of the underlying contract so that if you are actually "Called" because market went against you you can just surrender the stock.
William I wanna trade options! I know the risk you already told me to stay out of Cryptocurrency and yes my brother in law took out second mortgage with his bitcoin loss but I need to make money, and make it fast!
Like I have stated throughout my blog, to win at the stock market means to hold for a long period of time and sit tight. Review our current portfolio with names like BABA, NVDA, and others this chop in the market last week has hurt us, but I have not issued a sell on any one of the stocks we have chosen. However if you are invested in Ford or Sears (not in our portfolio)I would consider a cash out.
Options fpr uncovered calls means you agree to buy the right to sell a stock to someone at a given price so 100 shares of XYZ Company at $100 a share on October 26, 2018 the current price of the stock is at $92. If it remains at 92 no one will buy your 100 shares for $100 so your "Contract" is worthless on 10/27/2018. If however the stock is trading at $120 then you sell it to the buyer at $100 (they agreed to buy at $100) and collect the $20 profit for each share in other words $2,000 but you never had to buy the initial 100 shares of stock to complete the contract.
Now "PUT" that in reverse lets say you think that XYZ company is not only going to fall from it's $100 a share price but that it will fall to $80. So you place a contract to Put the 100 shares of stock to the buyer of the contract at $100 a share and the price goes up to $120. Your contract is worthless cause you do not want to exercise the right to put the shares to the buyer at $100 when you can sell them in the market for $120. Your option is worthless. If however the price falls to 80 a share then you exercise the option and "Put" it to the buyer at $100 (because they agreed to buy from you for $100) and you collect the $2,000 profit since stock is only worth $80. If you want you can now re-buy the shares at $80.
You can make money in the stock market regardless which direction the market goes. You can buy options on the Dow Jones Industrial Average, NASDAQ, S&P 500 and other index's as well. You can even trade an option on the VIX which is the overall volatility of the market.
Options are risky investments if you are not willing to lose your entire investment. The closer of course to the overall strike price of the option the more expensive it will be. Also the further out you go like November 16, or December 18 etc there will be a time value included in the options formula because the stock has a greater potential to move in that direction.
Let's go back to the XYZ uncovered call @ $105 closing on 10/26/2018 the price today 10/16/2018 is currently at $100 the cost of the option would be it's time value selling for $3.02 that means on 10/20/2018 if stock is at $105 it would still have a time value but you would be "In the Money" at anything over $105 so it might actually be $5.34 then finally on the expiration date of the contract the stock is at $120 as we have used in the example you are now $20 "In the Money" you exercise the option against the seller, meaning you will buy from him 100 shares at $105 on 10/26/2018 you go into the market place and sell those shares (100 shares of stock at $120) and collect the $1,500 profit (even though in real terms no shares of stock actually change hands; between buyer and seller).
I still want to express that options is a risky business if you are not willing to lose the whole investment; but it is 100% better than investing in Cryptocurrencies in my opinion at this time. You can open an options account at Ally which I have recommended or at your financial institution.
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