If you want to start trading options, its crucial to understand the difference between buying and selling. Buying Options: Buying options gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) on or before a specified date (expiration date). The buyer of an option pays a premium to the seller for this right. Buying Puts (Bearish): Buying puts is a bearish strategy generally used to hedge long positions or speculate on a drop in equities. Buying puts is also a long volatility strategy so if you believe fear will increase in the markets, buying puts is a good strategy. Buying Calls (Bullish): Traders will buy call options to replicate a long stock portfolio with less capital. For example, if you are bullish on Apple, instead of buying 100 shares, you can buy a call option for much less money. The downside of buying calls is that there is an expiration date. You can hold shares forever, but call options will eventually expire. Selling Options: The seller of an option is obligated to sell or buy the underlying asset at the strike price if the buyer of the option chooses to exercise their right. The seller receives the premium from the buyer as compensation for taking on this obligation. Selling Puts (Bullish): Selling puts is a bullish strategy where you collect a premium in exchange for the obligation to buy 100 shares of stock at the strike price. Traders often utilize the cash-secured put strategy when selling puts. Selling Calls (Bearish): Traders generally only sell calls when they already own 100 shares of stock, making it a covered call strategy. Selling calls without owning shares requires a high-tier margin account since it theoretically comes with unlimited risk. Full Context and Examples submitted by /u/LouDogg00 [comments]
