Options are a great way to make extra money in less time. Option trading involve huge risk and reward. When you trade stocks, you actually buy or sell them and they will never expire, unless the company goes bankrupt. However, when you trade options, you only buy the insurance or rights to buy or sell stock at a certain price. By trading options, you can either double your investments and or lose them all depending on how you invest. All options have expiration date, and if the price of a stock trends up or trends down depending on the bet you make, you could make a lot of money in short term.
If this is your first-time trading options, let’s start with basics. There are two important terms you need to remember; call and put.
Call is an insurance or right to buy a stock; while put is an insurance or right to sell them. There are at least four different scenarios where you could practice trading options.
- Buy Calls: The right to buy a specific stock at a certain price.
- Buy Put: The right to sell a specific stock at a certain price.
- Sell Calls: The obligation to sell a specific stock at a certain price whenever being asked before expiration date.
- Sell Puts: The obligation to buy a specific stock at a certain price whenever being asked before the expiration date.
In this introduction, we will only explain buying calls and puts, which are the most suitable for new investors. Before we start trading options, you need to request to enable your option trading.
Scenario 1 (Buying Call Option): Imagine that you think somehow, Uber stock will go up and you want to make money from the trend, but you do not have enough cash to invest. We can never time the market or stock, but there are situations we are as close as it gets to timing a stock.
If you have only $500, and you want to invest in Uber stock. You could only buy 15 shares, and if the Uber stock goes up 5 percent, you could only make $25.
Now, if you invest that $500 in Uber options, you could buy up to 5 Uber options with expiration of end of the next week. 5 Call options actually gives you, right to buy 500 shares of Uber which will be worth $16,000. Now, if the stock goes up 5 percent, you will be making over $833 minus the premium ($500) paid for the insurance to buy the options. Even if you practice your option, you will be making over $333 by investing $500. However, in most cases it is better to sell the insurance back in the market worth of $400.
Scenario 1 (Buying Put Option): Now, if you think that Uber price might be going down, and you want to make money by investing in Uber options, you will be buying Put options.
In this example, we are actually changing the buy to put, and the above will will show up. You can change the expiration date, and the strike price for the option you want to buy. Once you select a price per contract, on a certain expiration date, this will provide you details of the contract as below.