On the other hand, if you think the stock’s price will fall then you’d want to choose a put option with a strike price that’s above where you think the stock will bottom out. If you think the stock will continue to gain value, then you’d want to buy a call option with a strike price that’s below what you think the stock’s price will eventually reach. So, for example, whether you should buy a call option or a put option depends on whether you think the asset’s price will rise or fall over time. And you sell them when the purchase price dips below the strike price on a put option. Successfully trading options means knowing which way you expect a stock or underlying security to move, how high or low you anticipate the price going and how long you want to keep the contract in place. In a best-case scenario, you buy underlying assets when the purchase price is higher than the strike price on a call option. Knowing when to exercise an option can be tricky, and it hinges on both the strike price of the option and the timing. This means choosing call options with a strike price that’s higher than the stock’s share price or put options with a strike price that’s below the stock’s share price. A more aggressive investor, on the other hand, might take the reverse approach. Again, this can help with minimizing the odds of losing money if you decide to exercise your option to sell. Likewise, you might look for put options that have a strike price that’s equal to or above the stock’s trading price. You might not make a lot of money with this strategy, but you can insulate yourself against significant losses. This way, you can hedge your bets in case the stock’s price drops below the strike price. If you lean toward a more conservative approach, for example, you might look for call options that have a strike price that’s close to or just below the price a stock is trading for. How to choose options based on strike price starts with understanding your personal risk tolerance. Buying options at the wrong strike price could cause you to lose money if you decide to exercise your option later. That’s important for creating an options trading strategy that balances risk and reward. So before you purchase one you’ll know exactly what price you could buy or sell an underlying asset for. Strike prices are fixed for the duration of an options contract. Scales with "Short" in one pan and "Long" in the other So for example, if you buy a call option contract with a strike price of $15 you’d have the opportunity to buy shares of the underlying stock at $15 each, regardless of the current share price. When buying call options, the strike price is the price at which can you buy the underlying asset if you decide to exercise your option. Strike prices are set by the option seller, also known as the writer. In simple terms, the strike price is a set price at which you can exercise a call or put option. Minimizing losses while maximizing profits with options is tied to the strike price and knowing when to buy or sell. And having options in your portfolio can help with diversification.īut options trading can be risky and potentially expose you to higher losses. Options trading can be an attractive investment strategy, because if done correctly, you can potentially make money when a stock is going down as well as when it goes up. What’s important to remember about trading options is that the contracts you hold give you the right to buy or sell, but you’re not obligated to do either. Options have set expiration dates by which time you have to exercise your right to buy or sell. An option to buy is a call option an option to sell is a put option. Instead, you’re investing in contracts that give you the right or option to buy or sell an underlying asset, which can be shares of stock, commodities or other securities. When you trade options, you’re not buying shares of stock, bonds or other securities. If you want more hands-on guidance in trading options, consider matching with an expert financial advisor.īefore diving into what the strike price means it helps to have a brief look at how options trading works. Knowing what it is and how it works is central to a successful options trading strategy. A key concept to understand with options trading is the strike price. Trading options involves purchasing contracts that give you the right to buy or sell an underlying security or commodity at a given time. If you’re interested in building a portfolio that includes more than stocks, mutual funds or bonds, options trading is an investment alternative you might consider.
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