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What are Options?
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Josh (He/Him)
Financial Education Intern
Posted September 8, 2022
Are you looking for ways to enhance your portfolio? Do you feel like your portfolio isn’t diverse enough? Option trading is another way to enhance and diversify your investment portfolio.
Options have become popular to the average investor over the past few years. Options trading is a way for an investor to generate recurring income, regulate risk, and can sometimes produce quick turnarounds. One option equals 100 contracts, so if the contract cost is $0.12 then you would pay $12 for the option. Options can be purchased with brokerage investment accounts.
Two common terms referred to when speaking of Options trading is a call option or a put option. Essentially, if you purchase a call option you are predicting that you believe the price of a stock will increase to a certain value by a deadline. Alternately, purchasing a put option is predicting the price of a stock will decrease to a certain value by a deadline.
Whether you are buying a call or a put you can only lose the premium (what you invested), if price doesn’t go where intended. For a call, the maximum gain is unlimited because price can increase as high as it wants, but the maximum gain on a put is limited because the price of a stock cannot go below $0.
Many options traders like to speculate. Speculating means to put a wager on future price direction. A speculator might think that the price of a stock will increase or decrease based on their analysis. Speculating with an option is sometimes seen as more attractive than outright buying stock as it gives you more leverage than you might have purchasing stock.
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