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Financial Literacy

What Are Options? Here’s How to Jump-Start Your Portfolio in 2019

If you’re new to investing, you might be wondering “What are options?” Options might sound a little complicated at first, but they could be your ticket to reducing risk and building wealth. And we’ll show you exactly how to get started today.

The average stock market return is around 10% per year. That’s great, but it’s not going to make you rich. Options traders, on the other hand, can multiply these returns, seeing gains of 50% to 200% or more on a single trade.

Many investors view options trading as complex and intimidating. It doesn’t have to be with the right information as your guide.

We’ll not only show you how profitable options trading can be, but also outline how you can get started in no time flat.

Here’s everything you need to know…

Options Trading Basics for Beginners

Options give you the right to buy or sell a stock, at the price you specify, by the given expiration date of a contract. You pay pennies on the dollar for an option relative to the target stock’s share price, and have the opportunity to profit exponentially when the stock moves in the right direction.

You can only purchase options in groups of 100 shares, so the price of the option contract would be the quote you’re provided times 100.

You can have an option to sell shares, which is called a put option, or to buy them, which is called a call option. Both options have a strike price, which is the price of the stock you can buy or sell it for, as well as an expiration date for the contract.

If the stock’s share price drops below the strike price on a put option, you’re making money. And if the stock’s share price rises above the strike price on a call option, you’re in good shape.

These may seem like confusing definitions, but you’ll learn them quickly once you begin trading options. If you want an even more in-depth look at how this works, make sure you check out our beginners guide to trading options.

And you’ll definitely want to when you see how much money you can make…

How Much Money Can You Make With Options Trading?

Your earnings can vary depending on the option and what the share price does by the expiration date.

A good example is Yelp (NYSE: YELP), which was on our radar last April.

You see, this was a stock that had a history of going up in price as its earnings announcement date approached. And then the share price would drop along with any news.

If you bought a $43 call option on the stock when it was trading at $44.83, you could have made gains of 64% in just a few weeks when the share price jumped to $47.92. But if you simply owned shares of the stock, your gains would have come in at just 6.9%.

And those gains are conservative when it comes to options. The potential can be much higher.

Here’s a better example:

Animal health company Zoetis (NYSE: ZTS) had its trading halted temporarily in June 2015 amid news of a possible acquisition by a major drug company. Shares quickly jumped from $49.57 to $55.38 as soon as trading resumed.

That was a respectable gain of 11% on the day for investors who held the stock, but Yahoo Finance reported that one trader fared much better.

It turned out that a single options trader held call options with a strike price of $50.34.

By the end of the day, this trader made a staggering 1,300% profit.

Knowing this, that 11% gain in a single day isn’t nearly as attractive.

How to Make Money Trading Options

One of the things we recommend in our options trading for beginners guide is having a plan and sticking to it. There’s no place for emotion in options, since this can only lead to trouble.

Instead, choose the best exit points on your options and stick with them.

You should also learn how to find stocks that are ready to move. These might be companies that are poised to announce share buybacks, takeover targets or new products. Earnings season can also be lucrative for options trading since expectations can move share prices.

There are also ways to cover losses and reduce your risk with options. For example, you can use long-term options to “flip” stocks that you believe are going to be volatile but continue to appreciate.

In addition, a “straddle” can come in handy for more unpredictable stocks. This involves holding a put and a call on the same stock with identical strike prices. While only one option will be a winner, a big enough move will pay off the other option and provide you with a profit.

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