Lemme first say that I was completely skeptical about options as well. The stigma that is well known is about Selling Short on companies in order to make it big or lose big. Yes, this is certainly a very risky proposition and not for the faint of heart (or those who are not millionaires) however short sales are not the only option. In fact in most US based banking institutions there are restrictions in what you can do when trading options. Typically you must display proficiencies and apply for higher levels which involve greater risk. However the most basic type is the easiest and also least riskiest of all options. This doesn’t mean you cannot lose money but you can certainly take some risks but they are in your control.
The most basic of options level at eTrade financial only allows one play which is termed the Covered Call. Covered Calls present the least risk but requires that you own at least 100 shares of a particular stock. These options can only be leveraged in lots of 100 shares so 1 option will equal 100 shares of stock. If you want to sell 2 options of one company you will need 200 shares and so on so forth. Obviously selling or buying options on a company such as Netflix (worth over $300/share at the time of this writing) will mean you have invested at least $30,000 or have purchased the shares at some point (hopefully at a lower price) in order to exercise 1 option.
A Call is essentially a representation on a position of purchasing a stock. When you buy a Call you are reserving the right to purchase the stock at a particular price point set by what is termed the Strike Price. Selling a call means you already own the stock and are selling rights to someone else to purchase the stock if it meets or exceeds the Strike Price Puts are the opposite. In essence it is the cash equivalent of the stock being represented. To buy a Put on a stock means you are reserving the right to sell the cash equivalent of the stock at the strike price. Puts can be harder to grasp as it involves not actually owning the equity.
As mentioned earlier, covered calls are the lowest risk of all the options to exercise. For selling calls you already own the stock (specifically covered calls) and your worst case scenario is that you are required to sell the stock at a lower price than what the current market value is. However there are additional benefits such as if the equity you are selling options on happens to earn a dividend and you still own that stock during the period in which you’ve sold a covered call you get to keep the funds earned by those dividends.
Not all equities are alike and some will ebb and flow with how much popularity there is on those calls. When looking for equities there are several components *What is the volume on the options? (Note: This is NOT the same as the volume on the equity itself) *What is the *When the market is on a bull run not covering your upside can be a loss in profts *Don’t panic when selling options. Think as if you would have sold the stock at that price point instead
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