Stock options are sophisticated trading techniques that involve a good deal more risk than traditional stock trades. Buying and selling options involves purchasing the right to buy or sell a specific number of a particular stock in the future. Options convey the right to buy or sell but do not carry any obligations to the purchaser.
Open and fund an account with an online stock trading platform. Browse the platform's features to ensure that they offer options trading before opening an account. Some trading platforms shy away from options, while others include them as a core component or the major focus of their service. Make sure you find a trading platform whose pricing, customer service and analytical tools match your investment objectives.
Analyze the market for stocks that you believe will decline in value in the near future, as well as those you believe will appreciate in value.
Take a look at news reports and press releases to find companies about to expand through acquisitions, introduce new products/services or are experiencing a strong, long-term upward trend in price to find stocks likely to appreciate in value.
Watch for new laws and regulations, new industry developments or crises that may cause specific companies' stock prices to fall. Also keep an eye out for strong downward trends in established stocks to spot companies on the decline.
Purchase call options — options to buy — for stocks that you believe will rise in value in the future. As an example, you may feel that Bill's Widgets' stock price is about to rise when they introduce their new smartphone to the United States market. If you purchase a call option at today's price for one month after the product launch, you could find yourself paying much lower than the market price when you exercise the option. You could then sell the shares immediately at a profit. Call options are ideal for placing bets and reaping quick profits in the future.
Purchase shares of stock that you feel are about to decline in value, then place put options — options to sell — for these stocks. If you feel Bill's Widgets' stock price is going to tank after the U.S. market rejects its new phone, purchasing a put option can allow you to sell your shares at a higher price than the market value when you exercise the option. Put options are ideal for hedging against future downside risk on your current holdings.
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