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- What You Need to Know About Stock Options
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- What You Need to Know About Stock Options
Price: This is the price that the option has been selling for recently. This is basically how much the option buyer pays the option seller for the option. A market maker agrees to pay you this amount to buy the option from you. Ask: This is what an option buyer will pay the market maker to get that option from him. Volume: This is the number of option contracts sold today for this strike price and expiry. Open Interest: This is the number of existing options for this strike price and expiration.
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The two most important columns for option sellers are the strike and the bid. As you can see in the picture, there are all sorts of options at different strike prices that pay different amounts of premiums. And this picture only shows one expiration date- there are other pages for other dates. Click here for a bigger image.
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Each option is for shares. A conservative investor always has cash available to back this up. This makes it cash-secured. Here are your inputs, as well as the potential outputs of what can occur, courtesy of OptionWeaver :. If, over the next 3.
What You Need to Know About Stock Options
So, it dipped a bit. You bought a great company at a great price, and now hopefully you can expect plenty of capital appreciation and dividends over time. Selling put options at a strike price that is below the current market value of the shares is a moderately more conservative strategy than buying shares of stock normally. Your downside risk is moderately reduced for two reasons:. The maximum rate of return you can get during this 3.
Your downside risk, however, is potentially very big. If you own any stock and it goes bankrupt, you can lose your entire investment. Your friends would have to buy you drinks at the bar.
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I prefer companies that pay dividends, companies that have economic moats, companies with a differentiated product or service, and companies that have weathered recessions in the past. Put selling is moderately more conservative than normal stock buying, but you still must pick high quality companies to minimize your downside risk. I only suggest selling options on companies with a moat and a good balance sheet that you would actually like to own at the right price.
You either get paid a nice chunk of extra money for waiting to buy a stock you want at a lower price, or you get assigned to buy the stock at a low cost basis thanks to the option premium. This chart shows the potential rate of returns of this option sale compared to buying the stock today at face value:. The horizontal axis gives a range of potential prices that the stock might be at during option expiration. Past performance is no guarantee of future results. Certain option and index products, including those proprietary to Cboe, may be recommended by Cboe Vest and its subsidiaries from time to time.
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Options have specific investor risks.
What You Need to Know About Stock Options
Characteristics and risks of exchange-traded options are available at Cboe's website and Cboe Options Education Center. The information on the website was obtained from sources believed to be accurate, but we do not guarantee that it is accurate or complete. Hyperlinks to third-party websites contain information that may be of interest or use to you. Third-party websites, research and tools are from sources deemed reliable.
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