Basics

Learn options trading – Puts

A put is a contract that gives the holder the right to sell the underlying stock at a predetermined strike price, by a fixed expiration date, for a premium whose value varies depending stock price, and greeks.

The contract is written by the option seller who either owns the underlying, in the case of a covered put, or does not own the underlying, in the case of a naked put.

The buyer of the contract is called the Holder, and has a long position, the seller is called the Writer, and has a short position.

It is important to note the difference between writing and holding a call:

  • Holding a put position has limited profit: if the stock goes to zero the profit is maximum. However the risk is limited to the premium paid for the contract.
  • Writing a limited reward, and writing naked puts has unlimited risk, and covered calls have a very high risk (if a stock rises).
Follow up with:
  1. Writing a put
  2. Holding a put
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Learn options trading – Sell call ( Short call)

Selling, or writing a call creates the obligation to sell a stock at a predetermined strike price. This contract is sold for a premium, and if the stock does not reach the strike price by expiration, the contract will expire worthless, therefore the writer will keep the premium as a profit. However, if the stock does rise beyond the strike price, the writer will be obligated to sell the stock at that strike.

If the call writer does not have the underlying stock on hand, a short position on the stock will be created, this is called a naked call. If the writer does own the underlying stock, the position is called a covered call, and that stock must be sold at the strike price.

Shorting a call is profitable in a bearish market.

This is a preview of “Sell call ( Short call )

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Learn options trading – Buy a call ( long call )

Why buy a call when you can own the underlying, one may ask. This depends on the intentions and predictions of the holder.

Buying a call is a limited risk, unlimited reward scenario. However one needs to be careful when choosing the expiration date for the contract. You might end up out of the money, and lose everything.

Long calls are profitable in a bullish market.

This is a preview of “Buy a call ( long call )

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Learn options trading – Calls

A call is a contract that gives the holder the right to buy the underlying stock at a predetermined strike price, by a fixed expiration date, for a premium whose value varies depending stock price, and greeks.

The contract is written by the option seller who either owns the underlying, in the case of a covered call, or does not own the underlying, in the case of a naked call.

The buyer of the contract is called the Holder, and has a long position, the seller is called the Writer, and has a short position.

It is important to note the difference between writing and holding a call:

  • Holding a call position has limited risk with unlimited reward
  • Writing a limited reward, and writing naked calls has unlimited risk, and covered calls have a very high risk (for a stock that tends to 0).
Follow up with:
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Learn options trading secrets – Basics

Tricks and secrets of options trading have the potential to make you a fortune within a day. While minimizing the amount of money you could loose. The options trading market is one of contracts made on an underlying asset, and these contracts are not issued by the company or entity representing that asset. In essence, it’s like an insurance contract, you can use it to protect you from getting wounded, but you might not use it at all even though you did pay the premium. However if you use it the insurance covers you for several times more what you paid as a premium. That’s where it gets interesting.

Whether you’re already a stock trader and want to add options in the soup for protection, or if you’re a neophyte curious about options, I’ll go through the ins and outs of succeeding in this options world.

If you already understand the basics and how options work you can skip to the strategies section where we discuss several mathematical tools and secrets useful to options trading, and tricks to maximize the profit, while minimizing the risk.

This is a preview of “Basics of options trading

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