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Make Money From Options – Three “Options” To Make Profits

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Introduction

 

 

Whether you choose to invest or trade binaries, it’s important to understand the risks that comes along with investing with a derivative that is quite sensitive to price fluctuations. But if used to your advantage, you can find that you can be quite profitable with binary options trading as a means to boost the overall return on your portfolio.

This lesson will introduce the three main strategies of how investors and traders make money from options – speculation, income, or protection – and the advantages and disadvantages of each.

 

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

 

Speculation: Out-Smart The Competition

 

 

There are two kinds of options, calls and puts.

The first strategy we’ll look at is speculation.

Usually when a trader buys a call or a put, they are speculating on the stock price. If you think a stock is going to rise, you’d buy a call. If you think the stock is going to fall, you’d buy a put.

The advantage of speculating with options, is that it allows you the potential to profit from a securities price movement with a small initial investment for the option contract.

 

 

However, an option is significantly riskier than a stock.

For example, lets say you’re bullish and want to buy a particular stock. Because the stock is trading around $670 per share, purchasing 100 shares would require you to invest about $67,000.

However, you could purchase a call option for the same stock for significantly less.

For example, one contract recently traded for $19.90 per share – this means purchasing the contract allows you to control 100 shares of stock for $1,990, plus commissions and fees.

Obviously, this is far less than the stock’s $67,000 price tag. The ability to control a lot of shares of with less money, is known as leverage. Let’s see how leverage works with options.

For example, using the stock from before, lets assume that its price increased $10. The stock price increased from $670 to $680, resulting in a 1.5% return.

Now, compare this to changes in the option price. A $10 stock price increase pushes the option price from $19.90 to
$29.90, for a gain of approximately 50%. This is a pretty incredible return, and usually the reason why options traders are drawn to options.

 

 

However, what would happen if the stock fell?

As shown here, a drop in the stock price resulted in a 1.50% loss on the stock, which is unfortunate, but most investors can probably live with it.

However, the impact on the option price is stunning – as this $10 stock price change caused the option price to decrease nearly 50%.

Using Options To Generate Income

 

 

Another advantage of options is that they allow you to trade in any market condition, even sideways markets.

Income-oriented investors can use options as an avenue to create income, and are less concerned about the underlying stock moving.

In our previous example, the speculator purchased an option for a certain price. This means the option seller collected that price.

When the stock went up, the option seller lost money – and when it went down, they made money.

Selling options in sideways markets allows an investor to create income.

 

Using Options To Protect Capital Tied In A Stock

 

 

Now on to the third strategy, protection.

Investors may purchase put contracts for a particular stock. This is because puts allow investors to sell their shares at a certain price if the stock falls.

As you can see, there are a lot of ways to use options.

Options can be used for speculating, creating income, or protecting your portfolio.

As you learn more about options, you’ll discover which strategies best fit with your investing goals.

 

 

Quick Recap

In Review….

How To Make Money From Binary Options

 

  • As you can see, there are a lot of ways to use options
  • Options can be used for speculating, creating income, or protecting your portfolio

 

 

There are 3 ways investors and traders can use options

 

1. Price Speculation

  • Usually when a trader buys a call or a put, they are speculating on the stock price. If you think a stock is going to rise, you’d buy a call. If you think the stock is going to fall, you’d buy a put
  • The advantage of speculating with options, is that it allows you the potential to profit from a securities price movement with a small initial investment for the option contract
  • However, an option is significantly riskier than a stock
  • However, you could purchase an option for the same stock for significantly less
  • The ability to control a lot of shares of with less money, is known as leverage

2. Generation Of Additional Income

  • Another advantage of options is that they allow you to trade in any market condition, even sideways markets
  • Income-oriented investors can use options as an avenue to create income, and are less concerned about the underlying stock moving
  • When the stock went up, the option seller lost money – and when it went down, they made money
  • Selling options in sideways markets allows an investor to create income

3. Protection Of Portfolio Against Risks

  • Investors may purchase put contracts for a particular stock. This is because puts allow investors to sell their shares at a certain price if the stock falls

 

 

 

These are the different ways that investors and traders can incorporate binary options into their investment portfolio. Binaries are often times viewed as short-term investments meant to reap relatively quick profits to take advantage of price speculation, generate extra income for your portfolio, and can be used as a safeguard against the risks of investing capital in stocks.

Some investors and traders trade options in a relatively short time spans, such as a day, week, or month – others opt for binaries with a longer expiration, such as 2-6 months, or even as long as a year. It should be noted that binary options should only be traded unless you have a set investing plan in place before placing any order.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

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