Description
Transcript
A contract that gives me access to more potential reward paired with higher risk – what does that mean?
Options are derivative assets, meaning their value is dependent on a particular stock.
Typically, they’re attached to 100 shares.
Put options reserve your right to sell stock at a certain price and call options reserve your right to buy stock at a certain price.
Calls are a little easier to understand so let’s learn how they work.
First, call options are much cheaper than buying the 100 shares they represent – good deal!
So what’s the catch?
They expire.
You could choose the expiration date you’re comfortable with, but most options expire within a few months.
Let’s say you bought a call that reserves your right to buy shares at ten dollars for a stock currently at the price of ten dollars.
If the price of the stock rises to fifteen dollars you’d make about five dollars for each of your 100 shares:
Five hundred dollars minus the original cost of the option.
If you had bought the stock, you would have made fifty percent on your investment.
But, because options are cheaper than buying 100 whole shares, you would profit a higher percentage.
But remember: leverage means higher reward and higher risk.
Let’s say the price swings the other direction: the stock goes from ten dollars to five dollars.
In this case, your option would expire worthless.
But with eToro options your loss is limited to the cost of the premium which is usually a fraction of the price of buying 100 shares.
Now that you understand how a call option works, let’s talk about a put option.
A put reserves your right to sell shares at a particular price.
If you reserve the right to sell your shares at ten dollars and the price goes down to five dollars you’re once again making about five dollars per share:
Five hundred dollars minus the original cost of the option.
Options empower you to engage with the market in new and exciting ways.
Check out the description for more options content and explore eToro options today.