Stock Options are known to be the most versatile financial tools in the market of stocks, options, futures or currencies. Whether you are using put or call options the range of what they can do is vast. It’s a matter of fact however that this has also a negative side effect. Whenever you’re working with financial derivatives and ever-changing factors there’s the chance that funds are going to be lost instead of gained.
When it comes to puts and calls you have to think about the performance over the long term. A lot of traders and investors forget this and only take into consideration high yield rates. It is well known by a lot of seasoned option traders that eighty percent of all stock options run out with no value. Mostly, these are the option buyers who suffer a loss of the invested funds. The other side, the option sellers make the money the majority of of the times. The covered call strategy is one method of merging a stock purchase with the selling of a call option. Another method is selling put options.
When going for put option selling strategy as an option trader you need to make certain you totally understand what is taking place. The crucial thing to understand is what a put is there for. In case the price of a stock plunges the put is there to cover any losses. If this should take place despite the fact that the stock will lose value the put will actually gain in value. This way the stock is hedged or secured. For this kind of insurance folks pay the premium for this put which is around 10% of the total money invested.
If you change the sides and begin to offer puts you must know what possible cases could occur. First, the put seller is getting the premium for the put option. There are several factors which come into play that will decide how much that is and they include things like the underlying of the put and the volatility of that underlying combined with the duration of the put.
As you can see the risk of selling puts should not be underrated. Out of the money puts are a great way to start and lower your risks. There the premium is lower however the risk of the put to get “in the money” is lower also. Smart analyzing and investigation is called for in order to completely understand which stocks and options are likely to rise and are stable. These are the ones you need to sell puts for and will have a better potential for earning premiums.
As you can see the risk of offering puts shouldn’t be underrated. In order to keep the risk low you should start to choose the option strategies where you sell “out of the money” puts. With this type of put you have less premium cost however your to get “in the money” risk is lower also. Furthermore, one must do his research and assess which stocks and options are constant and more likely to rise in future which is also a general strategy when doing stock investing so that he can market puts on these types of stocks with a higher possibility of pocketing the premium.