With every new asset class comes new opportunities, but there can also be a learning curve. But don’t worry — we’ve put together a number of resources to help you get the hang of this latest addition to the eToro investing ecosystem.
What are options?
Options are a financial asset known as a derivative — meaning that they derive their value from somewhere else. In this case, stocks.
While the ins and outs of options can be complicated, the overall premise is simple: Buy a contract now, in order to lock in a purchase (or sale) price for later — even if that price changes for the general public. This means that you can leverage a small amount of money to make a much larger profit — if your predictions about the market are correct.
Your price — the price you lock in for the stocks — is called the strike price, and the money you put down to reserve that price, or buy the option, is called the premium.
The last important thing to know is that they are typically time-sensitive, meaning you’ll reserve your price only for a specified amount of time.
Trading options
So, how does one actually make — or lose — money, using options?
Well, there are two main ways you can interact with options on eToro Options. The first is by buying a call. A call is the right to buy shares at a particular price. When you purchase a call, you are expecting the price of the shares to go up. For example, you might buy a call with a $100 premium that reserves your right to buy shares at $10. If the price then goes up to $15, you’d make about $5 for each of your 100 shares — $500 — minus the original cost of the option ($400 profit).
The second way is by buying a put, which functions on the other side of the spectrum. A put is when you reserve the right to sell shares at a particular price. When you buy a put, you often think that the price of the underlying stock is going to go down. Let’s go back to our previous example. If you reserve the right to sell your shares at $10, and the price goes down to $5, you’re once again making about $5 per share — $500 — minus the original cost of the option (again, a $400 profit for a $100 option).
But let’s say the price swings the other direction: You buy a call, and the price goes down, or you buy a put and the price goes up — or in either case, the price doesn’t move at all. The only money you lose — typically — is your premium**.
That’s what makes options such an interesting investment: Unlike with stocks, your loss is (usually) limited to the amount of the premium**, which is often a fraction of the full price of the stocks.
eToro Options
eToro Options has an easy-to-use interface, meant to make options trading more accessible. For example, all options are generally cashed out at 3:30 PM EST / 20:30 GMT on the day of expiration**. That means that if your option gained value, you’ll see the cash in your account after the day of expiration, rather than the shares.
This means that you’re not responsible for turning those shares around and selling them yourself — further streamlining your experience and minimizing missed opportunities.
Get started
Want more resources on options? Head over to the eToro Academy to get a more in-depth look at how options work and other strategies you can use. Or, head over to eToro Options to start exploring your options today.
**There are certain edge cases in which you may be exposed to greater loss than your initial investment. Although these instances are rare, they can occur.
***In rare instances, we’re unable to sell expiring positions at 3:30pm EST. In these instances, clients are responsible for losses due to assignment or expiry.
Options are complex products, involve risk and are not appropriate for all investors. You may lose all your invested capital. Please review Characteristics and Risks of Standardized Options prior to engaging in options trading.
eToro Options offers listed US equity options trading via eToro USA Securities Inc., which is registered with the Securities and Exchange Commission and a FINRA member. Visit our Disclosure Library for additional important disclosures including our Customer Relationship Summary and Privacy Policy. FINRA Brokercheck© 2023
eToro UK clients should review Terms and Conditions in respect of this service.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.