What Are Options?

We trade (daily) written options, or said another way "selling naked puts".

Options are 'contracts' that control stocks. Stocks on the Stock Exchange.
These stocks are shares in corporations.

Some of this is very basic to some of you, but to others that are very new, it could be helpful.

1 Option controls 100 shares of stock.
10 Options would control 1000 shares of the same stock.

When you purchase a stock, you own it.
So 'time' is nothing really to worry about, as you can hold it for as long as you want.  (there are some unusual things that can happen, like a company going under, that can change this, but for purposes of this discussion, usually stocks you hold for ever).

Buy and hold is often what brokers tell their customers.

So, you can purchase a stock at $20 and hope and wait for it to go up.

OR

You could purchase an Option in the stock, actually a 'Call Option' meaning that you want the Stock to go UP in value...just like you wanted if you owned the stock.

So, why purchase the Option, when I can just go out and buy the stock?

The Option gives you leverage - remember 10 control 1000 shares. So, its only a fraction of what you need to spend to get the same results, and often better results!

As this stock rises in price - so does the Option.  And sometimes the Option rises or climbs faster, enough for you to double or triple your investment! Where as owning the stock, they don't generally climb that quickly! So, the Option gives you less to get in and more potential upside - what could go wrong?

Well, Options are contracts and contracts are only good for a length of time.
So, the major thing against an Option is 'time'.

Most people lose their money buying and selling Options.

Why?

Because time works against them.
Or time is not on their side!

More on this in later posts, because what we do is put time on our side!

So, back to options.

Say you own a car and wish to sell it for $10,000.

I could go and buy your car, by giving you the $10,000.
But what if I came to you and said "Give me 60 days, and I'll give you $1000 right up front that gives me the right to buy your car for $10,000 anytime within the 60 days."

You think to yourself, 'I am not getting any bites on my vehicle and this guarantee's me one of two things. Either my car would be sold for $10,000 within the next couple months - so that's good!
Or if it doesn't sell, my car just made me $1,000 anyway and then I could still try and sell the car afterwards again.'

So, you do it! Taking the thousand.

I would now have an option (in this example) on your car.

What can I do with this option?

Well, I could within 60 days - purchase the vehicle.
I could also try to sell the vehicle for more, and then go buy it from you 'exercising my option'.

OR

I could just sell the Option (the paper contract) instead! That would be easier, since I don't have to travel and get the car, or anything.

So, I find a potential buyer of this same vehicle and tell him this:
"I have the exact vehicle you want, and you told me you were willing to pay $12,500 to $13,000 for this car.  Well, I will sell you my option on this exact car $1200 that allows you to purchase the car for $10,000!"

All I did was sell the option - never took inventory of the stock (car).

That option made me 20% in a short period of time - didn't it?
Without putting out $10,000 and trying to sell the car for $12,000 to make 20%.

Starting to get it?

But we do more than simply buying and selling options - as good as that can be at times.
And those would all be 'Call Options' (wanting the stock to go up in value).

We will discuss "Put Options' later, this is closer to what we do to get 3% plus per month on our money.

-eric

www.3PercentPlusPerMonth.com 
www.OptionsWriter.net