Ever wondered how some investors make money when the market goes down or goes sideways? Or how they lock in profits before they even sell a stock? In this video I discuss options trading from scratch.
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What is a derivative? It's a financial contract whose value derived from underlying asset (stock / bond / commodity / currency). Examples include options, forwards (between two private parties over the counter), futures (sold on the exchange) and swaps (exchanging cash flows like debt).
As for an option, you can think of it like a ticket to see a concert. You have the right but not the obligation to buy (call) or sell (put) at a pre-determined strike price before the expiry date. You can write or sell an option to earn a premium and you can purchase an option.
What options trading platforms are the best? I love interactive brokers for more advanced trading, but used to find Charles Schwab with ThinkScript great as a beginner.
As for options trading strategies, beginner ones can include covered calls, i.e., selling calls when owning the stock. This generates rent or passive income on stocks you own but caps the upside. Or you could think of protective puts by buying a put on a stock you own like insurance if the price drops to hedge against downside risk. You could also sell a put and hold enough cash to buy the contract for the stock, which would allow you earn passive income and buy a stock at a premium discount if the price drops. More advanced strategies usually rely on `the Greeks' and buying and selling several options at once.
Be careful with naked options when you don't have enough cash or enough shares in your account - selling a call can have an infinite loss. Covered option trading is great for risk management. Also be cautious about margin calls from your brokerage when you buy on margin or leverage.
00:00 Intro
00:42 Derivatives
01:48 Call vs Put
06:27 Platforms
07:26 Strategies
11:38 Dangers
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