Ever wondered How Do Stock Options Work? It is a very difficult topic to grasp compared to just trading stock. BUT! Trading options has an awesome upside. It's called Leverage!
Before moving on, you must first know the following :
When mastered, come back here!
1.) Options control 100 shares~ You don't own them, you control them.
2.) Options either give you rights OR obligations
3.) Options operate using strike prices~You choose the strike price.
4.) Options have expiration dates~ You're in control of choosing the date.
5.) Buying options differ greatly from selling options. Buyers have rights. Sellers have obligations.
6.) Different options strategies, make money with different directions.
Learn these, and youll learn how do stock options work.
If this is the case, you do what we call "BUY a call." Buying a call gives you the right to buy 100 shares at the strike price you chose.
You believed that APPLE would continue to trend up so you bought a call when AAPL was $100/share. The next day, the President announced that SpaceEx would be using Apple as its primary software up in space. The next day, Apple was trading at $110/share. Even though everyone else has to buy Apple at $110, you have the RIGHT to buy 100 shares at $100 a share! So you instantly sell your contract and lock in the profit!
If this is the case, you will do what we call "Buy a PUT." When you buy a put, and the stock goes down, you have the right to SELL 100 shares at the strike price that you chose!
You bought a PUT on Boeing when Boeing was $200/share because you didn't think the business was doing too great. The next day, the 737 jets were grounded due to Engine failure. The next day, the markets opened and Boeing was trading at $150/share. You STILL have the right to SELL Boeing at $200/share! How the heck?!!! YES...its true :) So you sell the contract and lock in the profit!
BUT WHO WOULD WANT TO BUY SOMETHING LIKE THAT OFF OF YOU?
....The market makers do. They must make the market...
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