Thankfully, learning about how to start investing in options isn’t as difficult as it seems. In fact, anyone can start investing in the options market — even with as little as $1,000 or less. Does that mean that everyone should be involved in options investing? Probably not.
Puts, calls, strike price, in-the-money, out-of-the-money — buying and selling stock options isn’t just new territory for many investors, it’s a whole new language.
Options are often seen as fast-moving, fast-money trades. Certainly options can be aggressive plays; they’re volatile, levered and speculative. Options and other derivative securities have made fortunes and ruined them. Options are sharp tools, and you need to know how to use them without abusing them.
Stock options give you the right, but not the obligation, to buy or sell shares at a set dollar amount — the “strike price” — before a specific expiration date.
The beauty of options is that you can participate in a stock’s price movement without actually holding the shares, at a fraction of the cost of ownership, and the leverage involved offers the potential for sizeable gains.
Of course, this doesn’t come free. An option’s value, and your profit potential, will be impacted by how much the stock price moves, how long it takes and the stock’s volatility.
Here’s what to watch for:
We suggest reading more about options through the Montreal Option Exchange. Learn more about choosing an online broker in our primer here. You’ll then be better prepared to start investing in options.