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From zero to hero: buying options
Koen Hoorelbeke
Investment and Options Strategist
Résumé: In our new series "from zero to hero" we explain option techniques and strategies and make them accessible for everybody. This article provides an introduction to options trading, covering the basics of buying and selling options, how to make money with them, and the risks involved.
From zero to hero: buying options
Introduction
You've been navigating the investment waters, putting your money into stocks, ETFs, and other assets through Saxo. You've seen gains, maybe some losses, but overall, you're thinking there must be a way to optimize this. You've probably heard of options trading—a term often thrown around in financial circles—but haven't really taken the plunge to understand what it's all about.
If this sounds like you, you're in the right place. This mini-guide is designed to give you a straightforward introduction to options. We'll cover what you need to know to get started, the basics of buying and selling options, and important factors you'll want to consider. So, let's embark on this journey to potentially diversify your investment strategies and open up new avenues for profit.
Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
Basics of buying options
What is an option?
In the financial world, an option is a contract that gives you the right, but not the obligation, to buy or sell an asset—like a stock—at a predetermined price within a specific timeframe. Think of it like this: It's similar to making a small down payment to reserve the right to buy a house at today's price, with the decision to buy or not to buy needed by a certain date.
Why buy options?
- More with Less: One of the great things about options is that you can control a large amount of stock for a fraction of the cost. This means you can potentially earn more while risking less of your hard-earned money.
- Safety Net: Options can also act like an insurance policy for your investments. If you own a stock that you think might go down soon, you can use options to help limit your losses.
Types of options: call and put
- Call Option: This type of option lets you buy a stock at a fixed price within a certain time. It's like seeing a gadget you want but thinking the price will go up, so you 'reserve' it at today's price for a small fee.
- Put Option: A put option is the opposite. It gives you the right to sell a stock at a predetermined price. Imagine you own a gadget that you think might lose value soon; a put option lets you lock in a selling price for a certain period.
Navigating the option chain
An option chain is essentially a menu of all available options for a given asset. It shows different strike prices and expiration dates, along with the bid and ask prices for each. On our SaxoTrader Go platform, you'll find it displayed like in the screenshot below (our SaxoInvestor and SaxoTrader Pro platforms show the options chains in a similar fashion and although there might be some differences, the principles remain the same). To open a trade ticket, simply click on the bid or ask price—click on the ask price if you're looking to buy.
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