Options 101
1 options gives you the right to buy or sell a certain stock at a preselected price, (the selected price is called the strike price)
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There are two different types of options, a CALL or a PUT
CALL: This is used when you think the stock price will go up.
PUT: This is used when you think the stock price will go down.
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Example:
CALL
XYZ stock is currently trading at $50 a share, and you believe the stock price will go to $60 in the near future. You would buy a CALL option. If you choose the STRIKE price to be $52 then once the price of XYZ stock goes above $52 then you are in the money. At that point you have the right to buy the stock for $52 and sell it into the market for its current price.
PUT
XYZ stock is currently trading at $50 and you think it will go down to $40. You buy options with a STRIKE price of $48, after the price per share falls below $48 you have the right to buy up shares at the current price, which would be $42, and sell them back for $48 <<(STRIKE PRICE)
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TIME VALUE
The options always have an expiration date, you can pick 1,3,6 ect months out to give you a better chance of hitting your target, but keep in mind that the longer it is our for the more you will pay for the option.
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How to buy an option?
Each option contract is the right to buy/sell 100 shares. 1 contract = 100 shares
If you look at the pricing of the options you will see a bid/ask, lets say the you get the option for .50 cents, then you would multiply .50 times 100 to give you the price you pay for the contracts. In this case it would be $50 for the one contract.
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If you are making a profit on the options then either you can sell the option contract back out into the market or exercise it. Personally I would advise you to sell it back out into the market for greater returns.
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RISKs
In options you have limited risk, the maximum you can lose is what you paid for the contract. If the stock never reaches the strike price within the set time then it becomes worthless.
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