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If you’re looking to make extra money on the stock market, trading options can be a great solution. While trading can be complicated in the beginning, you can be incredibly successful with the right strategy.
Taking the time to learn what options are and understand some of the most common options trading strategies can help you decide whether this form of trading is for you.
What Are Stock Options?
Stock options give traders the right to buy or sell stock at a specific price within a set time frame.
The two different types of stock options are put options and call options.
Call options allow you the right to buy stocks at a set price before it expires, while put options let you sell the stock.
People usually will buy a call option if they believe the market price is going to go up. This means that the option is of value because the set price, called the strike price, is lower than the cost of the shares on the open market.
A trader usually will buy a put option if they believe the market price of a stock is going down. That means that their option is of higher value than the shares of that stock on the market.
What Is a Covered Call?
A covered call is a common options strategy where the trader either buys or owns the underlying stock and then sells a call option. They then wait for the buyer of the option to exercise it or allow it to expire.
If the contract is exercised, the shares will have to be sold at the strike price. If it isn’t used, the option expires, and you get to keep the stock.
Profit can be generated on both the sale of the option and the stock if the market price stays below the strike price.
What Is a Long Call?
A long call is when a trader buys an option with the expectation that it will increase in value before the option expires. This is the most basic strategy for trading options.
What Is a Long Put?
A long put is another basic strategy where the trader anticipates that the underlying asset will decline in value. If that happens, the put option increases in value.
What Is a Short Put?
A short put is when an options trader sells or writes, a put option.
If an investor writes a put option, they’re obligated to buy shares of the stock if the trader who bought the put option exercises their option. While they automatically gain the premium, the trader paid for the put option.
They could face substantial losses if the shares fall below the strike price.
While trading does carry risk, options trading is still a great way to earn an income and limit your losses.
Krystle Cook – the creator of Home Jobs by MOM – put her psychology degree on a shelf and dived into a pile of diapers and dishes instead. She is a wife and mother to two rambunctious boys, sweating it out in her Texas hometown. She loves cooking, DIY home projects, and family fun activities.