The following is an excerpt from the eBook, Options Trading 101, authored by MarketClub Options lead trainer, Trader Travis. Learn more about MarketClub Options and how to obtain this entire eBook.
So what are puts and calls?
Generally speaking, put options are used to both protect the value of your assets as well as make money when stocks fall in price. And, generally speaking, call options are how investors make ten times more money when stocks go up in price.
As an options buyer, it's not uncommon to earn (and lose) upwards of 40 - 50% return on your money.
But one of the inherent problems with options trading is that for new traders these returns just seem too good to be true.
Where else are you going to hear that you can make $1,000 in three days, or a 40 - 50% return on your money in a matter of days?
It's not like they teach you this stuff in school.
And with any other form of stock market investing, you don't have these returns and in such a short period of time.
So it's natural if you are a little skeptical, that's okay... so was I.
The problem is that these kinds of returns are normal. They can happen on a consistent basis if you develop the skills.
So what people do is choose to allow their skepticism to rule and they keep this kind of information out of their life when it can actually help them.
I do hope the example in the previous chapter was enough to at least get you to see how leverage can help you earn supercharged investment returns.
And yes, there is risk with trading options and you won't always make money, but the rewards are well worth the risk (at least in my opinion).
Stock options are precisely what the ultra-rich use for accelerated wealth creation! But what about the common man? What about the person barely scraping by and all they have is the dream of becoming wealthy?
As my mentor Dave Ramsey says, "If you do what rich people do, you will become rich and if you do what poor people do, you will become poor."
And the wealthy people I know either trade or at least know about stock options. Call options and put options are the two tools they use for asset protection and accelerated wealth creation.
You can buy a "call option" and earn supercharged returns on stocks that go up in value.
Or you can sell a "call option" and earn additional income on your stock holdings (this is done through a strategy called covered calls).
You can buy a "put option" and earn supercharged returns on stocks that go down in value.
Or you can buy a "protective put option" to ensure you don't lose money on a stock purchase.
On the selling side you can sell a "put option" and be paid to buy a stock at a lower price (this is done through a strategy called cash secured puts).
This is just a short summary to introduce you to the benefits of options trading. The benefits of options trading are what will keep you motivated to learn this. There's a lot to cover so you will need all the motivation you can muster up.
And even though there is a lot to learn, just realize that everything boils down to two components: calls and puts.
That's it! Call options and put options are the only two types of stock options. Everything else is just a variation or combination of these two.
Calls and puts are the building blocks of all option trading strategies.
Call Option: gives its buyer the right, but not the obligation, to buy shares of a stock at a specified price on or before a given date.
Put Option: gives its buyer the right, but not the obligation, to sell shares of a stock at a specified price on or before a given date.
NOTE: this is just an overview of calls and puts. We will go deeper into puts and calls in a little bit. For now just know that both calls and puts are used for asset protection and wealth creation and you can use them to make money in any market environment.
I repeat, you can use them to make money in ANY market environment.
Puts and calls are used to...
• Make money when stocks go up in price
• Make money when stocks go nowhere in price
• And to really make money when stocks go down in price
It's truly an amazing thing to both see and experience, which is why I hope you one day decide to become a successful options trader.
WARNING: I know from experience that understanding stock options is hard. There is just so much information to take in. That is why I'm not teaching you any advanced strategies just yet.
My focus in this ebook is on the basics.
Buying a call option gives you the right to buy a stock
Buying a put option gives you the right to sell a stock
4 Components Of An Option Contract
Underlying Security: Options are based on an underlying security (stock). Each stock option is linked to a stock. A specific company's stock option is linked to that specific company's stock, and the price of the option will rise and fall with the price of the stock. NOTE: Not all stocks have listed stock options
Right, Not Obligation: Owning an option gives you the right, but not the obligation, to buy or sell the underlying security (the stock) at a specified price.
Specified Price (Strike Price): Owning an option gives you the right to buy or sell a stock at a specified price. Listed options have been standardized to represent specific stock prices.
Time: Your right to buy, or sell, the underlying stock expires on a given date. The period of time the option exists is also known as the life of the option. After that date the option ceases to exist, the stock does not go away but the option does.
Keep an eye out for my next post.
MarketClub has been helping thousands of traders successfully navigate the markets for the last decade. But now, with MarketClub Options, members can learn how to accelerate their profits with the power of leverage and a strategy built for long-term success. Trader Travis will show you step-by-step how to find, execute and manage winning options trades. Watch his 10 Minute MarketClub Options Strategy.