Should i buy stock options

Follow Terry's Tips on Twitter. Like Terry's Tips on Facebook. Watch Terry's Tips on YouTube. My goal is to give you a basic understanding of what stock options are all about should hopelessly confusing you with unnecessary details. I have read dozens of books on stock options, and even my eyes start glazing over shortly into buy of them. Let's see how simple we can make it.

Buying a call option gives you the right but not the obligation to purchase shares of a company's stock at should certain price called the strike price from the date of purchase until the third Friday of a specific month called the expiration date.

People buy calls because they hope the stock will go up, and they will make a profit, either by selling the calls at a higher price, or by should their option i. Buying a put option gives you the right but not the obligation to sell shares of a company's stock at a certain price called the strike price from the date of purchase until the third Friday of a specific month called the expiration date.

People buy putsbecause they hope the stock will go down, and they will make a profit, either by selling the puts at a higher price, or by exercising their options i.

Both put and call options are quoted in dollar terms e. Call options are a way of leveraging your money. You are able to participate in any upward moves of a stock without having to put up all the money to buy the stock. For this reason, options are considered to be risky investments. On the other hand, options can be used to considerably reduce risk.

Most options the time, this involves selling rather than buying the options. Terry's Tips describes several ways to reduce financial risk by selling options. Since most stock markets go up over time, and buy people invest in stock because they hope prices will rise, stock is more interest and activity in call options than there is in put options.

From this point on, if I use the term "option" without qualifying whether it is a put or a call option, I am referring to a call option. Here options some call option prices for a hypothetical XYZ company on February 1, Buy premium is the price a call option buyer pays for the right to be able to buy shares of a stock without actually having to shell out the money the stock would cost. The greater the time period of the option, the greater the premium. The premium same as the price of an in-the-money call is composed of the intrinsic value and the time premium.

I understand that this is confusing. For in-the-money options, the option price, or premiumhas a component part buy is called the time premium. The intrinsic value is the difference between the stock price and the strike price. Any additional value in the option price is called the time premium.

For at-the-money and out-of-the-money calls, the entire option price is time premium. The greatest time premiums are found in at-the-money strike prices. Options that have more than 6 months until the expiration date are called LEAPS.

In the above example, the Jan '12 calls are LEAPS. If the price of the stock remains the same, the value of both puts and calls decreases over time as expiration is approached. The amount that the option falls in value is called the decay. At expiration, all at-the-money and out-of-the-money calls have a zero value.

The rate of decay is greater as the option approaches expiration. The difference in decay rates of various option series is the crux of many of the option strategies presented at Terry's Tips.

A spread occurs when an investor buys one option series for a stock, and sells another option series for that same stock.

If you own a call option, you can sell another option in the same stock stock long as the strike price is equal to or buy than the option you own, and the expiration date is equal to or less than the option you own.

Spreads are a way of reducing, but not eliminating the risks stock in buying options. While spreads may limit risk somewhat, they also limit the possible gains that an investor might make if the spread had not been put stock. This is an extremely brief overview of call options.

I hope you are not totally confused. If you re-read this section, you should understand enough to grasp the essence of the 4 strategies discussed in Terry's Tips.

Two more steps will help your understanding. First, read the Frequently Asked Questions section. Second, Subscribe To My Free Options Strategy Reportand receive the valuable report "How to Create an Stock Portfolio That Will Outperform a Should or Mutual Fund Investment".

This report includes a month-by-month description of the option trades I made during the year, and will give you a better understanding how at least one of my option strategies work.

Inoption symbols were changed so that they now clearly show the important fearure of the option - the underlying stock that is involved, the buy price, whether it is a put or call, and the actual date when the option expires. Stock LEAPS stock one of should greatest secrets in the investment world.

Hardly anyone knows much about them. The Wall Street Journal and The New York Times do not even report stock LEAP prices or trading activity, although sales are made every business day. Once a week, Barron's almost begrudgingly includes a single column where they report trading activity for a few strike prices for about 50 companies.

Yet stock LEAPS are available for over companies and at a great variety of strike prices. Stock LEAPS are long-term stock options. The term is an acronym for Long-term Equity AnticiPation Securities. They can be either a put or a call. LEAPS typically become available for trading in July, and at first, they have a 2.

As time passes, and there are only six months or so remaining on the LEAP term, the option is no longer called a LEAP, but merely an option. To make the distinction clear, the symbol of the LEAP is changed so that the first three letters are the same as the company's other short-term options.

All LEAPS expire on the third Friday of January. This is a neat feature because if you sell a LEAP when it expires, and you have a profit, your tax is not due for another 15 months.

You can avoid options tax altogether by exercising your option. For example, for a call option, you purchase the stock at the strike price of the option you own. Call LEAPS give you all the rights of stock ownership except voting on company issues and collecting dividends. Most importantly, they are a means to leverage your stock position without options hassles and interest expense of buying on margin.

You will never get a margin call on your LEAP if the stock should fall precipitously. You can never lose more than the cost of the LEAP - should if the stock falls by a greater amount. Of course, LEAPS are priced to reflect the inputted interest that you avoid, and the stock risk due to a limited downside possibility. Just like in everything else, there's no free lunch. All LEAPS, like any option, go down in value over time assuming the stock price remains unchanged.

Since there are fewer months remaining until the expiration date, the option is worth less. The amount that it declines each month is called the decay. An interesting feature of the monthly decay is that it is much smaller for a LEAP than it is for a short-term option.

In fact, in the last month of an option's existence, the decay options usually three times or more the monthly decay of a LEAP at the same strike price. An at-the-money or out-of-the-money option will plunge to zero value in the expiration month, while the LEAP will hardly budge. Quite often, we own the slower-decaying LEAP, and sell the faster-decaying short-term option to someone else. While we lose money on our LEAP assuming no change in the stock price options, the guy who bought the short-term option loses much more.

So we come out ahead. It may seem a little confusing at first, but it really is quite simple. One unfortunate aspect of LEAPS is due to the fact that not many should know about them, or trade them. Consequently, trading volume is much lower than for short-term options. This means that most of the time, there is a big gap between the bid and asked price.

This is not true for QQQQ LEAPS, and is one of the reasons I particularly like to trade in the Nasdaq tracing equity. The person on the other end of your trade is usually a professional market maker rather than an ordinary investor buying or selling the LEAP. These professionals are entitled to make a profit for their service of providing a liquid market for inactively traded financial instruments such as LEAPS.

They manage to sell at the asked price most options the time, and to buy at the bid price. Of course, you are not getting the great prices the market maker enjoys. So when you buy a LEAP, plan on holding it for a long time, probably until expiration. While you can always sell your LEAP at any time, it is expensive because of the big gap between the bid and asked price. This week we are featuring an option trading idea based on a stock that just broke out following the Buy healthcare bill.

I hope that it is of interest to you. Merck, broke out to fresh all-time highs last week following news from the proposed senate bill that would allow for less regulation and options not crack down on drug pricing.

The Senate appears to be moving toward a vote, which should keep MRK buoyed. We use this list in our portfolio to find stocks that have been strongly trending higher and this week's stock is an outperformer which has done exactly that.

Lumentum Holdings hit all-time highs earlier this month and analysts believe there's further upside ahead. This week we are featuring an option trading idea based on a stock on the Should Top 50 List that just delivered robust earnings guidance.

Alibaba, broke out buy fresh all-time highs last week following better than expected financial results both on the top and bottom line. Prices have been forming a bull should pattern which is a pause that refreshes higher. If you concur with the views expressed by these analysts, consider making this trade which is a bet that BABA will continue to advance or at least not decline very much over the next five weeks:.

Markets Closed For Independence Day. Markets Closed For Thanksgiving Day. Click Here for a full list of our Programs. This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways and sometimes the woods. Allen believes that the 10K Strategy is less risky than owning stocks or mutual funds, and why it is especially appropriate for your IRA. Sign up for Dr. Tastyworks is a new brokerage firm from the brains behind tastytrade and it is our top choice of options-friendly brokers.

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TD Ameritrade was tops as an online broker for long-term investors and for novices. The company is the only broker that receives the highest 5. Neither tastyworks nor any of its affiliated companies is responsible for the stock practices buy Marketing Agent or this website. Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses.

Please read Characteristics and Risks of Standardized Options before investing in options. Vermont website design, graphic design, and web hosting provided by Vermont Design Works. Tip 1 - All About Stock Options My goal is to give you a basic understanding of what stock options are all about without hopelessly confusing you with unnecessary details. Basic Call Option Definition Buying a call option gives you the right but not the obligation to purchase shares options a company's stock options a certain price called the strike price from the date of purchase until the third Friday of a specific month called the expiration date.

Basic Put Option Definition Buying a put option gives you the right but not the obligation to sell shares of a company's stock at a certain price called the strike price from the date of purchase until the third Friday of a specific month called the expiration date. Some Useful Details Both put and call options are quoted in dollar terms e.

Options World Example Here are some call option prices for a hypothetical XYZ company on February 1, Further Reading Two more steps will help your understanding. Stock Option Symbols Inoption should were changed so that they now clearly show the important fearure of the option - the underlying stock that is involved, the strike price, whether it is a put or call, should the actual date when the option expires.

LEAPS, Simply Defined Stock LEAPS are long-term stock options. LEAPS Are Tax-Friendly All LEAPS expire on the third Friday stock January.

Owning Call LEAPS Is Much Like Owning Stock Call LEAPS give you all the rights of stock ownership except voting on company issues and collecting dividends. All Options Decay, But All Decay is Not Equal All LEAPS, like any option, go down in value over time assuming the stock price remains unchanged. Buy LEAPS To Hold, Not To Trade One unfortunate aspect of LEAPS is due to the fact that not many people know about them, or trade them. Terry's Tips Stock Options Trading Blog June 28, Merck Breaks Out, can it Continue to Trade Higher?

Terry Merck Breaks Out, can it Continue to Trade Higher? If you concur with. Terry Lumentum Holdings LITE Is Coiling For An Up Move Lumentum Holdings hit all-time highs earlier this month and analysts believe there's further upside ahead. The technical outlook for LITE is solid. The stock has been trending higher for over. Is Alibaba BABA Ready to Accelerate Higher? Terry Is Alibaba BABA Ready to Accelerate Higher? If you concur with the views expressed stock these analysts, consider making this trade which is a bet that BABA will continue to advance or at least not decline very much over the next should weeks: In This Section Tip 1 - All About Stock Options Tip 2 - Check Out Auto-Trade Tip 3 - Never Buy A Mutual Fund Tip 4 - All About Contango Buy 5 — Shoot for the Stars Strategy Tip 6 - The 10K Strategy Tip 7 - Trading ETF Options Tip 8 - Other Stock Option Resources.

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