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Options trading is something that I have been doing for about a full year now. I’ve had a lot of people express interest over the last few months as I have begun to show options trades I have taken, so this first blog post is about some of the basics of what an option is and then the primary uses of trading options. If you want to trade options commission and contract fee free, check out WeBull options trading here.
The Basics | Option Buying
An option is a contract between a buyer and a seller. It gives the buyers (the owner or holder of the option) the opportunity to buy or sell the underlying asset at a specific strike price prior to or on a specified date. Options can provide investors with more opportunities than traditional equity buy/sell strategies. These contracts come in two main characteristics “calls” and “puts”. A call contract is a contract in which you bet the market will increase past a specified price by a specified date and pay a fixed premium to the option seller in order to purchase this contract. If the underlying price of the stock rises past your strike price plus the premium paid, you profit the difference x100 (each option contract control 100 shares). While a put is a contract in which you bet the market will decrease past a specified price by a specified date and pay a fixed premium to the option seller in order to purchase this contract. If the underlying stock falls past your strike price minus the premium paid at expiration, you profit the difference x100 (each option contract control 100 shares). If the underlying price of the stock is below your strike price (for calls) or above your strike price (for puts)at the expiration of the contract, you lose only the premium paid.
As you may have been able to predict, option selling is the opposite of option buying. Option selling is when you sell (or write) an option contract to an option buying and collect the premium from the buyer. You make money if the stock is at or below your strike price plus premium paid (for a call) or at or above your strike price plus premium paid (for a sell). Options selling has a defined reward and potentially unlimited risk, while option buying has defined risk and unlimited reward.
Below is a graphic that shows the main profit/loss characteristics between long/short stock long/short calls and long/short calls.