The key to using options to increase your stock market profits is that you must be able to correctly predict both the direction that the stock will move, and the approximate time frame in which the move will take place. If you miscalculate on either of these values, you will either break even, or loose. On the other hand, if you are correct, your profits may well exceed three times the amount you would have made with just a straight investment in the stock.
An option gives the owner the right but not the obligation to purchase something. More specifically, stock options are financial instruments that come in four varieties: Long or Short positions on a Put or Call.
Long means a person purchases a Put or a Call. Short means a person sells or writes a Put or Call. Option writing is a more advanced topic so this course will focus on the more common long or option buying and the following descriptions assume all positions are long.
A Put is the instrument that profits when the underlying stock declines in price. When the stock goes down, the value of a Put goes up. A Call is the reverse of a Put. The value of a Call goes up when the stock increases in...
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