While my first goal as Chief Analyst of Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster is to make subscribers money, my second goal is to share my options knowledge. I truly love the educational component of my role as I open stock traders’ eyes to the lucrative opportunities in options trading.
For example, why pay $16,700 for 100 shares of Alphabet (GOOG) right before earnings when you can risk $500 on a call option and have almost identical upside exposure?
Or, if you want to bet against a high-flying tech stock, don’t short the stock and have unlimited upside risk. Instead, you can buy a put and have your risk limited to the premium paid.
And while I can write about calls, puts and iron condors for pages, I know that many readers sometimes learn best when the information is short and to the point.
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Demystifying Options
The Basics of Calls and Puts
A Call Buy gives the buyer the right, but not obligation, to buy the stock at a pre-determined price and time.
A Put Buy gives the buyer the right, but not the obligation, to sell the stock at a pre-determined price and time.
The most you can lose on a Call or Put purchase is the premium paid. The risk is limited to that purchase price.
When to Buy Call or Put Options
When to buy a Call – feeling bullish about a stock or index
When to buy a Put – feeling bearish about a stock or index
Positive Options Trading Scenarios
Call Buy - Stock goes higher = Profit is unlimited.
Put Buy - Stock goes lower = Profit is unlimited until the stock goes to zero
Negative Options Trading Scenarios
Call Buy – Stock goes lower or is little changed
Put Buy - Stock goes higher or is little changed
3 Possible Outcomes of a Call Buy:
- Exercise the Call and take delivery of the stock at the strike price
- Sell the Call for a gain or loss
- Let the Call expire worthless (most you can lose is the premium paid)
3 Possible Outcomes of a Put Buy:
- Exercise the Put and sell the stock at the strike price
- Sell the Put for a gain or loss
- Let the Put expire worthless (most you can lose is the premium paid)
Decoding Options: What Does it Mean?
XYZ January 100 Call (expiring 1/17/2025) for $5.50
- XYZ - The stock the option is based on.
- 100 Call – The Strike Price. This is the price you have the right, but not the obligation, to buy the stock at ($100).
- $5.50 – The Premium you have to pay. And because contracts represent 100 shares of the stock, you actually pay $550 ($5.50 x 100 = $550)
- (Expiring 1/17/2025) – That’s the date when the option expires.
How Do I Choose Which Option to Buy?
The longer an option has until its expiration the more it will cost as it has a greater likelihood of finishing “in the money.” Shorter-duration options cost less, as they are less likely to succeed.
In-the-money options cost more than out-of-the-money options as they have a greater likelihood of finishing in the money and succeeding.
In-the-money call/put buys are high conviction trades as the premium paid is high.
Out-of-the-money call/put buys are lower conviction trades as the premium paid is small.
Cabot Options Trader, Options Trader Pro and Cabot Profit Booster
In both up markets and down markets, options provide investors with a way to make more money and hedge their risk.
My Cabot Options Trader advisory is currently closed to new subscriber (although there is a waitlist for prospective subscribers). Alternatively, you may want to consider the Cabot Profit Booster advisory to increase your portfolio returns.
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