02) Calls and Puts
This is just going to be a quick overview to get you started.
When a trader believes a stock will go up, they would buy Calls. If they believe it will go down, they would buy Puts.
A friend of mine says “call it up, put it down”.
You might be thinking “Okay, great, so I can do exactly what I can do with stock trading. I can buy long or I can sell short.” But, let me show you how trading options can GREATLY improve your ability to control your trade over stock trading.
For each 1 options contract you buy, you are controlling 100 shares of the underlying stock.
Depending upon settings we will discuss in more detail later (strike price, expiration date, moneyness, etc) you can set your own leverage. This gives you the ability to be very aggressive with the trade and gain a large amount of earning potential with a relatively small amount of money invested.
For example on a $50 stock, you could buy at the money options for around $2. Therefore, to control $5000 worth of stock, an options trader would pay $200 ($2 x 100 shares controlled). You can see from that example, just how leveraged your money becomes with options.
Next,… let’s look at the risk protection qualities of options
2) Risk Control
With stock trading, if you believe a stock is going to go down, you could sell short that stock.
This strategy gives you a limited return potential and an UNLIMITED loss potential. Therefore, if you sell short, you could lose more than 100% of the value of your shorted shares.
Options trading flips that risk/reward back into your favor. Instead of selling short, you can buy Puts in a stock you believe will fall in price. The Puts give you UNLIMITED RETURN and LIMITED loss potential. That sounds much better, doesn’t it?
So, to summarize: Calls when bullish, Puts when bearish. Leverage your money much better than stock trading, AND ability to control your losses.