If the stock price rises, however, you'd be obligated to sell the stock to the option buyer at the strike price. This strategy can be a way to produce additional income from investments you already own. If the stock price stays below the strike price, you'd get to keep both the stock and the premium you received from selling the option. To try to make some money on the stock over the short term, you could sell a covered call option. Or, you might think the price of a stock you own is going to rise, but only very gradually. Again, that's your opinion. Or, you could sell the option contract itself for a profit because its price would have also risen because the underlying stock's price is higher. You could "exercise" your option to buy the stock at the contract's strike price, assuming it's now lower than the current market price. If you're right, and the price of the stock goes up, you'd have two choices. To act on it, you could buy a call option. Let's say you think the price of a stock is going to rise. That's your first step - you've formed your opinion. Let's look at three common options strategies, using stocks as the underlying asset. There are a number of options strategies, depending on what you want to achieve and what your opinion is about the underlying asset's future price. Knowing how to buy options and what strategy to choose first requires you to have an opinion on whether or not the price of that underlying asset will go up or down. An option's price - the premium a buyer pays for it - is determined by factors such as the price of the underlying asset, the length of time until the option expires and the volatility of the underlying asset. How are options priced? Options are called "derivatives" because their price is derived from the value of the underlying asset. How are options different than stocks? There are some key differences, including: options come with an expiration date and an exercise price options don't come with shareholder rights and don't pay dividends and options generally cost only a fraction of the cost of the underlying asset. Calls give buyers the right to buy a security at a predetermined price puts give buyers the right to sell a security at a predetermined price. There are two main types of options: calls and puts. As with stock investing, buyers want to pay as little as possible for the option, while sellers want to sell for as much as possible. Since it's a contract, buyers and sellers have certain rights and obligations to the other party. ![]() What's an option? An option is simply a contract between a buyer and a seller that speculates on the future price of an asset, like a stock, for example. Here's what we mean and how it can play out. The key with trading options is to start with an opinion about what's going to happen to an underlying asset. Hold up! While it's true that some options strategies can be complex, options themselves are actually relatively straightforward. First off, there's the lingo, like calls, puts, futures, forwards, swaps, and strike prices. Depending on how you use them, options can generate capital gains, reduce market risk and produce income. Like equities or bonds, options are another asset to invest in.
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