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What are Stock option? How does it works ?

  You might have bought a stock or two in your life, but it's less likely that you've traded options or even understand what they are. Stock options are essentially contracts that allow an investor to buy or sell a stock at an agreed upon price. There can be options for most securities, even indexes and ETFs. While on basic definition options sound simple, buying and selling them and the price movement they can have can be a little bit more confusing. You can buy something called a call option which allows you to buy shares of a stock or a security at a later time. Conversely, you can buy something called a put option, which allows you to sell shares of something at a later time. However, buying options doesn't mean that you have to own the underlying company or security like buying stocks do. Rather, owning options contracts means that you have a chance to eventually own the security, but you don't have to. It's an option. One of the better ways to think about options are like bets on the direction the price of a stock will move. If the price doesn't move in the direction that is needed for an options contract to work. 


In other words, if the price to buy when your option contract expires is less than the contract price, then your option expires worthless and you lose all of your investment. But options are also significantly cheaper than the stock, and their value is just a percentage of the underlying asset. When buying or selling options, the investor can exercise the option anytime until it expires. Options are always options. You're not locked into things like you are with futures contracts, which trade in similar ways. Because of this optional system of options, they're considered derivative securities, meaning their price is directly correlated to the price of something else, and thus they're less risky than stocks if you know what you're doing when you purchase them.

 Trading options can be done for two primary reasons, betting on the market or hedging your investments against the market. The price of an options contract you agree to is known as the strike price, and you pay a fee for buying that options contract referred to as a premium. The strike price is the price you're betting a given stock or security will move to. You pay a premium to make the bet, and thus the price at which an option can be profitable is generally a little more or a little less than the strike price depending upon whether it's a call or a put option due to that premium. 


 A call options contract gives an investor the right to buy a number of shares, generally 100 per contract, at a specified price over time with an expiration date. You'd buy a call option for a stock if you thought the stock was going to go up in price further than your strike price. In this case, you'd be able to buy a stock for less than it was actually worth, meaning you'd make money. You can also make money by selling the call option to other options traders before it expires and they can choose to use it to buy the stock. So call options are for when you think the price is going up. But what about put options?


 A put option is a contract that gives an investor the right to sell shares of a stock or security at a certain time in the future. Everything else works the same as call options except in reverse. The lower a stock drops below the strike price of a put option, the more that option is worth. Think of it like this. Say you owned 100 shares of concerning reality stock, the best stock on the market. But that's beside the point. But you were worried I was going to start missing uploads and otherwise making bad business decisions for my channel in the next month or two, causing my stock to drop in price because I wouldn't be as good of a channel. You might want to buy a put option to protect yourself from my stock dropping like crazy. If my stock dropped from $100 per share to $50.00 per share, but you owned a put option at $75 per share, you'd be able to sell my stock for $75 per share, saving yourself a ton of money compared to if you didn't own the option. This is one way you can hedge your investments to protect yourself from heavy losses using options. So with all of that worked out.


 Options trading is essentially just the buying and selling of the options we've just discussed. You can trade options on most brokerage accounts, even Robin Hood, which if you download with my link in the below, you can get a free stock. If you own an option for a stock and the strike price on the contract is more than the stock price, the option is considered out of money because it's basically still worthless. You wouldn't want to pay more for something than it's worth Right. Conversely, a call option is in the money. If it's strike price is less than the price of the stock, it means you're getting a discount on the purchase. These terms work in reverse for put options since you're selling the stock and not buying it. One of the biggest benefits to options is the ability to bet on the movement of a stock without actually owning the underlying stock. Say you thought Apple stock was going to go up, but you didn't want to spend the money on 100 shares, which would be about $10,000 at the time of recording this. You could instead spend a much smaller amount of money for call options for 100 shares, say $100, and if the stock did go up, maybe 10% of the stock price. You might be able to double your money by selling the option. In this case you took $100 and turned it into $200.00, a 100% return on investment, whereas if you'd bought the stock you would have had to have spent $10,000 in only made $1000 when the stock went up. Only 10% of your investment. While you technically made more. You didn't invest as much to begin with either. We're looking at percentages here, and the option to contract made way more. So why wouldn't you just always want to buy options contracts then if the returns are so great? Well, it's because if the stock were to have gone down rather than up, you would lose all of your money when you own the actual stock you only lose  10% and you could still make money if the stock goes up in the future. When you own the option for a stock with an expiration date and the stock drops 10%, not only does your call option become worthless, but it also expires at its end date and you no longer own anything. Because options are much cheaper than the security they're a contract for. You can invest the same amount of money as buying a stock and get far greater returns. Betting on the market with options is highly risky and not for the unskilled investor, as you can hopefully see by the examples we've posed. But experienced traders who understand the market can minimize risk by buying and selling the options at the right time. It's when inexperienced traders want to bet on markets that trading on options can get pretty risky, so hopefully now you know a little bit more about the basics of options trading and how these derivative securities work. There's a lot we left out like strategies and more complex ways to utilize options which was intentional due to how complex options can be when you really dig in. So did you learn anything? If you did, comment below. If you thought we left something out or would like to see a follow up techstorror and comment below as well. And as always. Thanks for taking a moment to learn something.


 

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