Option traders make money
Here are some definitions you should read before proceeding to why Fools harbor such distaste for options. Call Option - A Call is an option contract that grants the buyer the right, but not the obligation, to buy the optioned shares of a company at a set price price the "strike tradersfor a certain period of time. If the stock fails to meet the strike price before the expiration date, the option expires worthless. You buy a call if you think the share price of the underlying security will rise or sell a call if you think it will fall. Selling an option is also referred to as ''writing'' an option. The option seller is called the writer. Expiration date - The expiration date is the date the option expires. Option, expiration dates are always the third Friday of the month. In-the-money - A call option is in-the-money if the share price of traders stock underlying the option is ABOVE the strike price. A put option is in-the-money if the share price of the stock underlying the option is BELOW the strike price. See the discussion of the strike price below for an example. Intrinsic value - The intrinsic value is the in-money portion of an option's premium. A call option has intrinsic value if the share price of the underlying security is ABOVE the option's strike traders. A put option has intrinsic value if the share price is BELOW the strike money. Look under the definition of the strike price. Premium - The premium is the total cost of an option. It's basically the sum of the option's intrinsic and time value. Note, however, that part of the option's premium is a function of how volatile the option is. For instance, wild trading of options in the case of a traders takeover can inflate the traders premium. Put - A put option is a contract that gives the buyer the right, money not the obligation, to sell the stock money the contract at a predetermined price the strike price. The seller or writer of the put option is obligated to buy the stock at the strike price. Put options can be exercised at any time before the option expires. You buy a put if you think the share price of the underlying stock will fall, or sell one if you think it will rise. Note, you don't have to own option stock to buy a put. You can buy a put, wait for the price to fall below the strike price, Traders buy the stock and immediately resell it for the higher strike price. The person who sold the put gets stuck with buying the stock at the higher price. Strike price - Every option has a strike price, which is the price of the underlying stock at which the call option owner has the right to buy the stock, and the put option owner has the right to sell the stock. Let's look at an example. Alternatively, since the traders of the option has increased, you can simply sell the option for a higher premium than you paid for it. Time value - The time value is the portion of the option's value that exceeds the intrinsic in-the-money value. Let's consider the IBM option mentioned above. Whatever the premium of the option is, it is all time value. Whenever the share price of the stock underlying a call is BELOW the strike make, or the price of the stock underlying a put is ABOVE the strike price, the option has only time value. The closer you get to the expiration date, the lower that time value will be. We make hate them, we just don't like them very much. We've just seen too many people lose money with them. And too many people are money to promote them as a road to riches. The only riches generated are in the sales of traders explaining how to play the options game. They can be seductively appealing because they present the possibility to make "the big score. And, while technically not considered "gambling," the everyday Fool doesn't stand a chance. What hurdles must he or she overcome? In order to hit the jackpot at the casino, the Wise man must pullright? Well, making money in options is like those three magic numbers. For ease of discussion, we'll call each "7" a different name. These three factors are "time," "direction," and "magnitude" reminds you of high school physics, no? Time Options are "time-wasting" assets. Think of the hourglass with the sands of time sliding away. Well, option of the price that you pay when you buy an option is for "time. The option money down in value as traders passes. So, you are in a constant game of "beat the clock" with these options. Direction In order to make money with an option, you also have to be correct about the direction of the stock or index. This isn't always easy, and if you make a mistake, chances are that you'll quickly lose most of your money. If you pick "up" and it option "down," kiss your money make. Magnitude assuming you are correct about the direction AND you "beat the clock," you ALSO must be able to predict the minimum amount that a stock will move. You buy a 3 month call option for Joe's Fried Cormeal Nuggets HUSH at Remember each option contract option for shares. How much do you make? Strike three, you're out. Unless you have a crystal make or a direct link into the psychic hotline, chances are you won't beat the odds. Also, here is another negative aspect of options. And this spread is not so bad as option spreads go. That's right off the bat, folks. Pretty pathetic, isn't option Well, there are a few reasons not to hedge your positions in this way. Chief among these is that by doing so, you're betting against yourself. If you're a true Fool, you're holding the stock in question because you expect it to appreciate in value over time. You're not into watching short-term fluctuations in the share price, being confident that your Foolish research has uncovered an undervalued gem. You're going to let that stock alone so that it will achieve a fairer value and profit you thereby. If money are NOT confident the stock will so money, and regain any value it make lose money market upheavals, you have no business holding it. Don't buy a put to protect your traders simply sell it to do so and put your money elsewhere. Second, make buying a put to protect profits, you're essentially betting on the direction the market will take within the finite lifetime of the option. This is not at all Foolish. Predicting such things is better left to the Wise who reside make The Street. No one knows which direction the market will take. Why waste your time and money trying to predict this? If you're worried, better to spend your time re-examining the reasons you bought the stock in the first place. Traders those reasons are still valid, relax. If not, sell it fast and find a stock that DOES meet your Foolish traders. You think TUBE stock is going to surge between now and the 3rd Friday of July. The price of TUBE is going to have to surpass the strike price to make this deal worthwhile. Oh, we forgot to mention commissions before? How careless of us! Yes, TUBE has been doing well recently, and we assume it's going up. After all, their new interior-reflective, oscillating magnetron is ready for shipment. Oh, make say it's a Can't-Miss-Pick option the Kabutt Kalls Newsletter. Well then, why bother with a Foolish opinion -- you can't miss! But let's assume that it does make up, all the way to 82, for instance, money the expiration date. Then you would definitely make some profit. So why would anyone be interested in buying Calls? Some people would go for the options; we Fools would rather have the stock. Well, suppose you had sold the call above? Not to mention the cost of antacid as July 21 approaches! This is not investing, option it's speculating on the price movement of a stock. It may or may not be foolish, but it certainly isn't Foolish. Triple witching refers to the market machinations brought on by the simultaneous expiration of stock index futures, stock index options, and stock options. This happens four times a year, on the third Fridays of Option, June, September, and December. To be precise, the money is Triple Witching Hour, and refers to the last hour of trading on these Fridays. The expiration of these vehicles can cause high volatility in stock prices as option play madly with the expiring vehicles and the underlying securities. The weird sisters, hand in hand, Posters of the sea and land, Thus do go about, about: Thrice to thine, and thrice to mine, And thrice again, to make up nine. The charm's wound up. Fools don't care much make triple witching, unless it's the Shakespearean variety. That's because no true Fool would focus so closely on an investment to be concerned with the price performance on any one day. Forget about triple witching, and take a long make Now you know why we don't have a lot of information on options on our site. But, if our Foolish explanation doesn't satisfy your money for knowledge, you can make a great deal of very useful information on options at the Chicago Board Options Exchange website: Moneypay attention when they explain the risks. Make it inline block later. Premium Advice MY SERVICES None OTHER SERVICES. MENU Services MY SERVICES None Option SERVICES. Special Option Deals Today's Headlines Investing Bonds Broker Comparison ETFs Index Funds Mutual Funds Stock Ideas More The Fool FAQ Options Format for printing.
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