12/25/2023 0 Comments Stock optionsIf you bought ABC stock at $50 but were worried about the stock’s price going down, you might purchase a put option with a strike price of $50 that expires in six months at $1 per share. Let’s take the same example of ABC stock at $50 per share. Put options are often compared to insurance because they protect your investment against loss from a stock going down in price since you can still sell at the original (presumably higher) strike price. It gives the buyer the right to sell shares at a specific price and the seller the obligation to buy those shares if the option is exercised. Put optionsĪ put option works in the opposite way. One additional note to keep in mind, dividends go to the owner of the shares, not to the owner of the call options. Consequently, it's important to calculate your potential losses so you only lose what you can afford. If you bought ABC stock outright without options, you'd still have the asset and could wait to see if it went up in price later.īuying options is cheaper than buying stock, but you could lose your entire investment if your predictions are incorrect. Exercising your option will only make sense if the stock price increases since you would pay more at the strike price than it's trading for in the market. However, you lose money if the stock doesn't increase by more than $1 per share in six months. If you’d spent the same $5,000 on options as you did on ABC stock in the first scenario, you’d now have $200,000. This is an increase of $5 per share multiplied by 100 shares minus the $100 premium, which translates to a 400% return. If ABC stock rises the same 10% to $55 a share, your $100 is now worth $400. Instead of spending $5,000 to own ABC stock, you can buy it at the same price with only spending $100 for the call option. You'll pay a premium for this option, let's say $1.00 per share ($100 total). In this example, the price (known as the strike price) is $50 per share. Now let's say that instead of buying the stock, you purchased a call option that allows you to call for someone else's shares at a specific price. Your $5,000 investment is now worth 10% more. If ABC stock rises by 10% to $55 per share in the next six months, your portfolio will grow to be worth $5,500. Let’s say it’s trading at $50 per share, and you buy at this price for a total of $5,000. It also obligates the seller of the option to sell their shares at that price if called upon to do so.įor example, say you want to own 100 shares of ABC stock. Call optionsĪ call option allows the buyer to purchase (or call away) shares of stock at a particular price. Here are the basics of each option type and common situations when investors use them. These two varieties can be mixed and matched in endless combinations ranging from simple, including covered calls, to complex, such as iron condors. There are only two types of options, including calls and puts.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |