Options trading strategies include various methods of using call and put options to generate income. These tools can be used by investors who want to speculate on rising or falling share prices for the long term or those who simply wish to strategically balance their portfolios to minimize risk and maximize yield. However, new investors must learn a few key details before venturing out into the market. This will help them avoid costly errors and give them a better understanding of how these instruments are used in everyday investing.
What Are Call Options?
As far as stock market investments go, call options are quite straightforward: They allow the holder to purchase shares at a predetermined price (known as the strike price) during a set time period (the life of the contract). This can be particularly advantageous to investors who want to secure shares at a discounted rate or make extra income from the security they already own.
In simplified terms, call options are agreements that give buyers the right – but not the obligation – to purchase an asset (in this case, stock) at a specific price during a specified period of time. Investors can also use them as part of advanced strategies that leverage their portfolios in multiple ways.
What Are Put Options?
Put options function in much the same way as to call options except for one major distinction: They allow users to sell assets instead of buying them. However, put options are typically used for speculative purposes only, as they allow investors to purchase shares at a lower cost than the current market price. This is because put options only add value if the price of an underlying asset declines dramatically during or after the agreed-upon time frame.
For these partnerships to work, both parties must agree on terms before completion. For this reason, contracts should never be accepted without first understanding how and when they can be exited in case things go south before time expires.