Options and shares
Do you trade in stocks, but are you curious about other ways to invest your money? Or would you like to know how you can (possibly) earn more money with your investments? Then you can consider trading in stock options. This not only allows you to try to make more profit than with regular stock trading, but also protects your stock portfolio against potential price drops.
What are stock options?
Options are derivative products . With an option, you do not buy or sell the shares themselves, but you obtain the right to buy or sell a number of shares within an agreed period. The price of the options on shares is mainly determined by the share price and the degree of mobility of the shares, also called volatility. With share options, this almost always involves 100 shares.
What types of stock options are there?
There are 2 types of stock options:
- Call options: A call option gives you the right to buy shares at a predetermined price. You do this before the expiration date.
- Put options: A put option gives you the right to sell shares at a predetermined price. You must also do this before the expiration date.
With stock options, there are 2 parties involved: a buyer and a writer. The option buyer obtains the right to buy or sell the shares for the exercise price, as long as the option buyer does so before the agreed expiration date. The option writer has the obligation to buy or sell the shares at the exercise price, if the option buyer wants to exercise his option right.
Why trade stock options?
Trading stock options has several advantages:
- Protection against price drops: A put option works as an insurance against price drops. By buying put options, you have the possibility to sell the shares for the strike price if the price drops.
- More return on your shares: By writing call options you can get a higher return on your shares. This is because you receive a premium for these options. On the other hand, you are obliged to sell the shares if the market value of the shares becomes more valuable than the exercise price.
- Options have leverage: Leverage amplifies the effect of a small movement. With options, you use this leverage to respond to price movements. You invest a relatively small amount in options, while you can achieve high returns with this. Your maximum loss is only the option premium.
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