It’s best to understand the risk/reward trade-offs by looking at how much you’d be risking versus how much you’re likely to gain. But that doesn’t mean you should always go after the options with the highest premiums. That premium, minus transaction costs, is the cash you receive in exchange for taking on the obligation to sell your stock shares at the strike price. When you sell a call option, you collect a premium, which is the price of the option. If your objective is to earn some income on your stock positions, you could consider selling or “writing” a covered call. Dipping One Toe in the Water: How to Sell Covered Calls
They’ll start to make more sense as you gain experience and become more educated about options trading. The option seller has the obligation to buy the shares if the owner “exercises” their right to sell.ĭon’t worry if words like assigned, exercised, obligation, and so on seem confusing. The option seller has the obligation to sell the shares if the owner “exercises” their right to buy.Ī put option is a contract that gives the owner the right to sell (typically) 100 shares of the underlying security at the strike price, any time before the expiration date of the option. A necessary starting point is to understand what calls and puts are.Ī call option is a contract that gives the owner the right to buy (typically) 100 shares of the underlying security at a specific price (the “strike” price), any time before the expiration date of the option. Your options education starts with learning the difference between call and put options. It’s really about your objectives and risk tolerance. There’s no one right way to trade options. When trading options, one thing you’ll learn quickly is that options are not for everyone. There are basically three reasons to trade options: as a speculative tool, as a hedge, and to generate income. Options were designed to transfer risk from one trader to another. What’s the best way to start learning how to trade options?įirst off, it’s best to understand what options really are.
Also, options trading seems complex, mysterious, and maybe even a tad bit intimidating.
It sounds like a great idea, but options have their own risks, and knowing the stock world does not prepare you for those risks. You’ve heard you could potentially generate income from stocks you own by trading options.
So you own a bunch of stocks in your portfolio.
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