How to Bet on Options

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How to Bet on Options | Options Betting

How to Bet on Options | Options Betting

Introduction to Options

Many traders across the world are turning to options as a stock substitute because it has a higher leverage and less required capital. Just like the stock, options can be used to bet on the direction of a stock’s price. There are differences between stocks and options. One of the most important differences between stocks and options is that stocks give you a certain degree of ownership in a company, while options give you the right to buy or sell the stock at a specified price by a specified date.

Types of Options

There are two types of options, namely calls and puts. When you buy a call option, you have the right but not the obligation to purchase a stock at the strike price any time before the expiration of the options. When you buy a put option, you have the right but not the obligation to sell a stock at the strike price any time before the expiration date.

How Options Work?

There are always two sides for every option transaction: a buyer and a seller. When a call or put option is purchased, there is always someone else selling it. When individuals sell options, they effectively create a security that did not exist before. This is known as writing an option. This explains one of the main sources of options. Neither the associated company nor the options exchange issues options. When you create a call, you may be obligated to sell shares at the strike price any time before the expiration date of the option. When you write a put, you may be obligated to buy shares at the strike price any time before expiration.

All stock options expire on a certain date which is called the expiration date. Normal listed options have expiration dates up to nine months from the date the options are first listed for trading. Options officially expire on the Saturday following the third Friday of the expiration month. So, you have to trade the option by the end of the day on Friday as your broker is unlikely to be available on Saturday and all the exchanges are closed on Saturday.

Option Pricing  

The price of an option is called its premium. If you buy an option, you cannot lose more than the initial premium paid for the contract, no more what happens to the underlying assets or security. So, the risk to the buyers is never more than the amount paid for the option. The seller of an option assumes the risk of having to deliver of the shares of the stock if it is a call option or taking the delivery of the shares of the stock if it is a put option. The seller’s loss can be open-ended, meaning the seller can lose much more than the original premium received unless the option is covered by another option or a position in the underlying stock. When betting on options, the profit potential is unlimited.

The Bottom Line

Betting on options should be used as part of a larger strategy based on a selection of stocks. Trading options is very different from trading stocks. You should carefully do the research and understand the concepts of options before betting on them.

 

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