Some Tips and Tricks To Think About Before Buying Stock Options Online and In the Stock Market

What is a stock option?

A stock option is similar to a future contract, but they vary somewhat. Unlike the stock itself, you do not own the stock option. Stocks you can hold onto indefinitely. A stock option has an expiration date. The one downside to a stock option is that the closer you get to the expiration date the less your option is worth.

The stock option is a vehicle you can use to achieve your desired goals. You are making a promise to pay the difference between what the stock is worth now and what it will be worth at some point in the future.

What does that mean?

Example Number 1

You have $1,000 to invest. Now, you can buy 5 Amazon stocks. These stocks are worth $200 earnings per share. Your cost is going to be $1,000.

Now, say that your Amazon shares increased by 10%. That means your shares are now worth $220. The difference between the two is $20 earnings per share. Now you multiply that by 5 and you get $100. Your take on the investment is going to be $100. That is the 10% markup. You now technically own $100 of Amazon stock.

Now, say that the markup occurred during the remaining months before it was due to expire? You might lose most of what you invested in the stock. Now, say that the 10$ price increase happened in a single day and further away from the expiration date. That means you get most of the 200% and your take the money home.

Example Number 2

Now, say that the stock decides to decrease before the expiration date. The value is at $200. You can choose “at the money put contract” option. The strike price is $200 and the expiration date is June 5th, 2018. The cost of each share is $10. You buy 1,000. You have spent about $1,000.

Now, the stock loses 10% of the value. That reduces the value to $180. You now have a difference of $20. The end result is you get $20 earnings per share because you lost the $180. However, you still get an end gain of 200% because you bought 100. Your take home is now $2,000.

Three Tips To Understand the Stock Market Better

1) You need to understand the technical part of the process (i.e; a strategy is key).

2) You need to understand the fundamental aspects (ie; the difference between a good and bad company).

3) Be sure of what you want because time is not your friend.

So this was our take on how creating a strategy of analyzing the ratios of profitable stocks is necessary before signing up or investing in them. So that even though the prices rise or fall, you end up with a gain. There are various experts out there who can help you make the best decision based on thorough research, read more about them.