What Should I consider when trading options?
Hey guy, are you interested in trading options? Have you ever invested in them? Before, we have talked about options, including definition, types and profit&loss diagrams. Today, we would like to continue on risks of options trading verified by different types of holders and writers.
Call Holders – If you buy a call, you are buying the right to purchase the stock at a specific price. The upside potential is unlimited, and the downside potential is the premium that you spent. You want the price to go up a lot so that you can buy it at a lower price.
Put Holders – If you buy a put, you are buying the right to sell a stock at a specific price. The upside potential is the difference between the share prices (suppose you buy the right to sell at $5 per share and it drops to $3 per share). The downside potential is the premium that you spent. You want the price to go down a lot so you can sell it at a higher price.
Call Writers – If you sell a call, you are selling the right to purchase to someone else. The upside potential is the premium for the option; the downside potential is unlimited. You want the price to stay about the same (or even drop a little) so that whoever buys your call doesn’t exercise the option and force you to sell.
Put Writers – If you sell a put, you are selling the right to sell to someone else. The upside potential is the premium for the option, the downside potential is the amount the stock is worth. You want the price to stay above the strike price so that the buyer doesn’t force you to sell at a higher price than the stock is worth.
To make it simple, if you buy an option, your downside potential is the premium that you spent on the option. If you sell a call there is unlimited downside potential. If you sell a put, the downside potential is limited to the value of the stock.
It is important to note that investment in options would be risky. Please make full consideration before entering an options trading.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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MTPockets : Thanks this was Very helpful. I want to start trading options but I’m having trouble grasping how to with enough knowledge that I wont lose money due to a buy that made no sense. I think I’m going to have take a leap and try with a option on a penny stock. Maybe once I actually put what I have read into a real situation I will understand better. I always seem to have learn hands on. Lot of times this leads me making mistakes but as long as I learn and grow from the mistake it’s all good.
Meta MooOP MTPockets: Thank you for your support.
If you want to review more about options, you can simply click to review.
Dave1688 : Great