Understanding Options

There are only three reasons to use options. The first is that they provide income. You can sell an option on your stocks; it is called a covered call. The buyer will pay for that right to buy your stock. If the stock hits a strike price they have the right to buy your stock, if it does not hit the strike price you keep your stock and their fee. Either way you win. The second reason for options is protection. You can sell a “ put “on your stock at a specific price. This protects and locks in some of your gains. The third one is hedging, you could buy an option on the S&P 500. If your individual stock portfolio goes down, you actually receive money based on the S&P 500 going down. This hedge would help protect you should the market crash. But let’s face it most people use options for speculation, they buy options to get-rich-quick. Some people do make a reasonable amount of money with options. You can use leverage to buy a stock that went from $10 to $20 and make millions.