Do you think Meta’s stock price, which is currently going for about $178.91 (August 17), could rise to $200 by January 2023? If you answered the question subconsciously, what you have just considered is called options, which entails the future price prediction of a given asset.
While most people assume that it’s like gambling on live casino games, it’s much more complicated. For one, unlike gambling, your decisions can be informed by the past, present and potential future.
The best thing about dealing with stock options is that it allows you to make a profit during both volatile times, regardless of which direction the market is moving in. As long as the prices of stocks keep changing, there are ways you can take advantage of them.
Before diving into the deep end of the intricacies of today’s subject, let’s take some baby steps and first learn the basics, starting from the definition of stock options contracts.
What are Stock Option Contracts?
An options contract gives a buyer the choice to buy or sell. Depending on the contract both parties have drawn out, the chosen asset is sold or purchased at a price indicated in the contract at a given expiration date.
It is vital at this point to note that options are not shares. Many people in the stock trading business often contradict the two. Options are merely contracts, where each contract represents 100 shares.
Types of Option Contracts
There are two types of options contracts:
The call option comes in handy if you think the stock price will move up as it speculates on the price increase of an asset. These contracts allow the buyer to buy a specified asset within a specific period and then profit when the underlying shares increase in price.
If, for instance, Meta is currently going for $178.91, you may anticipate its future price and predict it will rise to $200 by January 2023. You can then make a call on it that it will appreciate. Should this appreciation come to fruition, and you bought that call today, you will have made money up until the price hits $200. Additionally, you’ll earn even more money when it surpasses $200.
On the other side of the spectrum, we have put options which allow you to make money off a stock’s price going down. The catch here is that you first pay a specific premium for a company’s stock price to fall, such as Tesla. However, if the price decrease of the stock does happen, then you stand to profit.
This is a great tactic to use on red days when the market is in turmoil. A great example of this is during the early days of the COVID pandemic, a lot of people profited off put options. On the flip side, put options lose value when the stock goes up.
Besides the types of the options contracts, the two other vital definitions you must understand about stock options are as follows:
The strike price is a term used in trading circles to describe the price at which the stock can be bought or sold. It is the price at which the given shares will appreciate (call) or depreciate (put).
Again, looking at Meta’s share price, which is currently going for $178.91, you may have two strike price options. If you’re feeling good about the price in the future, you may have the price going to $200, which is a call. In contrast, if you have information from the market predicting a poor near future, then you may set your strike price at $160 in January 2023, which is a put option.
Bid vs Ask Price
The bid price represents the maximum price you are willing to pay to purchase a share. On the other hand, the ask price is the minimum price the owner of the share is willing to sell.
Quick Tips for Beginners
For the most lucrative returns on your investment, some of the quick-fire tips you should have at your fingertips when you start trading on stock options include:
- Look for stock options with the highest strike volume and volatility.
- Take risks that have huge profit potential but don’t be blind to the facts.
- If the price range does not tally with your budget, simply walk away.
- Look at weekly, monthly and annual trends in the stock market before making decisions.
- Practice different stock options trading strategies depending on the market movements.
- For the best success rates, invest in rock-solid companies that perform well and have good growth patterns – hence the use of Meta in our example.
Like any other field in the world of finance, the more information you gather, the better you’ll be at trading stock options. So, keep sharpening your skill along the way to make the most out of any decisions you’ll make.