Options are nothing more than a contract with a specified premium, strike price and expiration date. Unlike buying and selling stocks or funds of stocks, options provide almost an endless number of strategies.
Nevertheless, all options trading has two sides — calls and puts. Both are “sold” by an options trader. You sell a call if you expect the price of a stock to go up and you sell a put if you expect it to go down.
Both of these actions pay you premiums — cash income — based on the current market price of that particular options contract for a specific stock.
Both calls and puts represent 100 shares of a stock. Regardless of which way you are trading, one option always equals 100 shares.
As simple as all that sounds, there is more to it.
So what’s the difference?
A call option gives the buyer the right, but not the obligation, to buy the stock at a specific price (strike price) within a specific time frame (expiration).
A put option, on the other hand, gives the buyer the right, but not the obligation, to sell a stock at a specific price (strike price) within a specific time frame (expiration).
No matter what happens, the seller collects the premium. Once the contract expires, assuming it expires worthless, the seller can offer it again and continue to make cash income.
Options are a great way to make money and generate a steady flow of cash regardless of which way the market is driving stocks. Traders of all experience levels take advantage of this amazing process to help increase their cash income.
Another great thing about options is you don’t necessarily have to own any stocks to make money. If you weren’t quite ready to own a specific stock because it wasn’t at the price you want, you sell puts out-of-the-money (OTM).
However, you should have the cash to cover the purchase in case it does get exercised; otherwise, you will be operating on margin, i.e., borrowed money.
The further out-of-the-money (OTM) you go, the less likely the chance of getting the stock put to you. However, if by chance you did get the stock, you have another options trade ahead of you — you can turn around and sell covered calls.
Don’t sweat it if you get a stock put to you, because the chances are you would want that stock at your selected strike price anyway. Once you own it, selling covered calls allow you to generate extra cash.
Bull market or a bear market, anyone can generate cash by trading options.
Now, how aggressive you are with options trading is completely up to the individual and their overall goals for their portfolio, so don’t jump in headfirst without first knowing the risks and understanding how options really work.