Posts Tagged ‘what is a put option’
The stock market happens be one of the very popularly accepted strategies for you to create money.
Within the actual stock niche one very very cost-effective ways to create wealth is options trading. I personally get 15 t0 20% every single month by trading options, more notably put options.
Generally there are are two different features to put options investment.
At this time there is the element associated with safeguarding on an individual’s account also known as buying insurance for your stock, and then there is the wealth building, monthly cash flow side aka getting paid to own a stock. Let us have a quick view at each of these.
Buying Insurance with Put Options
Being the purchaser of this put options contract, you’ve got the “option” to be able to offer the stock set at a certain price until you sell the option or perhaps the particular option expires.
Nearly all investors take advantage of puts to protect their trading account from big movements to the downside and also lock in profits.
For example, lets say an investor purchased a stock and it increased in price by about $10 per share. This is a really large move.
At this point the question you will be asking is…must you take profits or perhaps let it ride? Additionally you need to take into account that if you do nothing, your earnings may be erased within minutes with some not so great news. Taking absolutely no action is probably the worst steps you can take within the stock market. What do you do in that situation?
You can buy a put option with a strike price which is a number of prices below the current price of the stock. Using this method, it is possible to sell your stock at that strike price regardless of what happens to the cost of the actual stock. For example, if you acquired the stock at $200 and it increased to $250, you could purchase the put at $240. With the $240 put option, it doesn’t matter how low the stock goes, you can still sell it at $240! So, if the stock drops to $30 per share, you can STILL sell it at $240, think about that for a second…let it sink in.
Making Monthly Passive Income with Put options
On the other hand of the put options coin is the way you are able to create wealth with options by making residual income each and every month.
In order for the stock buyer to secure his stocks by purchasing protective puts, he will need to have someone willing to sell those put options to him.
I personally generate income each month by selling put options against stocks I might be prepared to own and sometimes even against stocks that I never plan to own.
The important thing if you want to be building wealth with put option selling will be to sell puts on securities you will not mind owning and also look for stocks that are relatively flat as far as their price goes. Flat stocks are stocks that will move at most $3 in a four week period and possess very low PE ratios.
I find that I also have a substantial amount of success by trading stocks in the $20 – $30 cost range. Anything higher or even lower is typically too risky in my experience.
I have been investing for over a decade and have done meticulous research on how to build wealth. My primary focus is on strategies that can create low risk residual streams of income.