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Stocks Trading tools If you are planning on making a big purchase, but you think the item may go on sale in a week, what would you do? Buy now?
Wait and see? How long would you be willing to wait for the price to drop?
Types of Orders The most common types of orders are market orders, limit orders, and stop-loss orders.
What does the price need to be before you buy? Are you willing to risk the price going up by not buying right away? These questions are also applicable to investing, especially when buying stock in a company.
Options are popular tools used by investors who want the flexibility to potentially buy or sell shares at some point in the future. This article will outline one of the quick money adena common options strategies: cash-covered puts.
What is a cash-covered put? When and why to use cash-covered puts Have you ever entered a limit order to buy a stock below its current trading price, only to find yourself waiting around for the price to drop for your order to execute?
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With a cash-covered put, you can. By selling a cash-covered put, you can collect money the premium from the option buyer. The buyer pays this premium for the right to sell you shares of stock, any time before expiration, at the strike price.
The premium you receive allows you to lower your overall purchase price if you get assigned the shares. But what happens if you are not assigned the shares on or before expiration? You keep the premium.
While your intention may have been to own the stock, at least you received some incentive for waiting around for the stock to drop in price. Setting aside the cash for this transaction ahead of time allows you to prepare for this scenario. Remember that 1 put option contract equals shares of the underlying stock.
Step 2: Selling a put option Selling a put option allows you to collect a premium from the put buyer. Regardless of what happens later on in the trade, as the put seller, you always get to keep the premium that is paid up front.
Profit and risk potential With cash-covered puts, the profit potential has 2 components: the option trade, and if the stock gets assigned.
Due to high volatility in the options market, Robinhood requires you to set a limit price for all options trades.
The most you can make from the option trade is the premium. If the stock is assigned and you are given ownership, your upside is potentially unlimited options transaction price out of limit the stock moves higher.
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You can see how the risk involved with a cash-covered put differs from using a limit order to buy a stock. To learn more about put options and how they work, take a minute to watch a short video on Selling puts.
Next steps to consider.