How Do Speculators Profit From Options?

How to work on options correctly. Learn to Use Technical Indicators Correctly

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By Albert Phung Updated Oct 25, As a quick summary, options are financial derivatives that give their holders the right to buy or sell a specific asset by a specific time at a given price strike price. There are two types of options: calls and puts.

Call options refer to options that enable the option holder to buy an asset whereas put options enable the holder to sell an asset.

Speculationby definition, requires a trader to take a position in a market, where he is anticipating whether the price of a security or asset will increase or decrease. Speculators try to profit big, and one way to do this is by using derivatives that use large amounts of leverage.

This is where options come into play.

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Options in Operation Options provide a source of leverage because they can be quite a bit cheaper to purchase in comparison to the actual stock. This allows a trader to control a larger position in options, compared with owning the underlying stock. In these cases, all gains and losses will be magnified by the usage of the options.

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All the options would be worthless then because no one would exercise the option to buy at a price that is greater than how to work on options correctly current market value.

The speculator's anticipation on the asset's situation will determine what sort of options strategy that he or she will take.

What Are Puts and Calls?

If the speculator believes that an asset will increase in value, he or she should purchase call options that have a strike price that is lower than the anticipated price level. In the event that the speculator's belief is correct and the asset's price does indeed go up substantially, the speculator will be able to close out his or her position and realize the gain by selling the call option for the price that will be equal to the difference between the strike price and the market value.

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On the other hand, if the speculator believes that an asset will fall in value, he or she can purchase put options with a strike price that is higher than the anticipated price level. If the price of the asset does fall below the put option 's strike price, the speculator can sell the put options for a price that is equal to the difference between the strike price and the market price in order to realize any applicable gains.

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Also if you are buying a Call Option you are limited in losing the option premium which in most cases would be much less that what you could lose if you bought the shares directly. Both options would provide a similar gain if the stock price went up. So your risk for the same gain is greatly reduced in buying options instead of the underlying shares directly. In reality they're absolute. Secondly, if buyers and sellers are numerous but balanced, the price does not move yet the liquidity is high.