subject: How To Buy Stock Options - All You Must Know About Purchasing And Selling Stock Options [print this page] For a lot of traders stock options seem to make more sense because the risk is lower. Lets face it with today's economy any risk diminution is an excellent thing even if you do hold a large pocket book. So why is it that stock options represent a lower risk? It is simply because you have the chance of paying a percentage of the original price with the possibility to sell the stock later on as an alternative to buying the stock itself. However before you run off and start buying, there are a couple of things you as a potential investor ought to know. Primarily you should take a moment and study how to buy stock options. What are your options? How can stock options be bought and how are dates vital? But before we start lets discuss a number of things and answer questions....
What are the Stock Options?
As you learn more about how to buy stock options it's important to realize that they are basically a contract between parties which is agreed to expire on a certain date. If you are the buyer, you're purchasing the right, but not required to buy or sell this option when it expires. This is known as Underlying. The stock holder is able to make the decision to acquire or sell his stock option, at a price level known as "the strike price".
Two main forms of stock options: puts and calls. If investing in puts, this gives you the right to sell the underlying in the specified period of time. But, if you want to buy the underlying you should buy calls. You should watch the fluctuations of the market prices on the underlying stock, and as soon as you anticipate a rise you must purchase calls. However when you anticipate the market rate to drop, buying puts would be a wiser choice.
Selling
This is absolutely not as simple as it seems because the value of the options fluctuates very quickly. In case you possess calls, you should sell them if their price goes above the strike price, while puts owners must acquire them if the price goes below the strike price. You must understand that the obligations and the rights of the buyers are opposite to those of the sellers. Selling covered calls is certainly less risky, this meaning that you sell to someone the right to buy the stocks that you actually posses. "Naked" selling implies the fact that you are selling stocks that you don't yet possess and this can be tricky.
The crucial thing you have to consider when using options to buy stocks is that you don't trade the actual stock, but a right. Nonetheless, if the stock itself is not credible, the options would be worthless. The advantages of stock options versus long term stock investments is that the risk is lower and the money you need for the initial investment is less.
