Beginner’s Guide to Options

Thu Oct 8, 2020, 06:27 pm | by Delaney | No comments

Options are something traders and investors can use to give themselves…options. It’s all in the name, but what are they really? This blog will break down the basics of options and how they can be used.

What Are Options? 

Options are a type of derivative that gives you the option to buy or sell a stock at a predetermined price and by a predetermined date. An options contract will cost you a premium, or contract price, and is much less costly than buying the stock outright. There are two types of options: puts and calls. Option contracts usually contain 100 shares of the stock. This blog discusses options in stocks, but options can be written for any asset, like bonds, ETFs, and commodities. 

Put options give you the right to sell a stock at a predetermined price, by a predetermined time frame. These increase in value when the stock falls in price. You can buy or sell puts. Investopedia says you can think of put options as “an insurance policy.” 

Call options give you the right to buy a stock at a predetermined price, by a predetermined date. These increase in value as the stock price rises. You can buy or sell calls. Investopedia gives the example that call options can be thought of as “a down-payment for a future purchase.” 

If you buy options, you are the holder. Options sellers are writers. If you are the holder of a put or call, you do not have to exercise the option. Call or put writers, are obligated to exercise the option if it expires “in-the-money,” or if the strike price is less than the current market price. 

Options are typically seen as less risky because you can choose to not exercise the option, and just take the premium cost as a loss if it doesn’t go in your favor. However, options still have a level of risk and have varying levels of risk depending on the stock and setup chosen. 

Options strategies vary from very simple, single options, to very complex with multiple positions held. 

Read More: How to Understand Option Alerts

Why Use Options? 

Options, when used properly, can be a great enhancement to your trading. People use options for: 

  • Income 
  • Leverage 
  • Hedging
  • Speculation

Basic Options Strategies 

Long Calls 

Sentiment: Bullish 

When to Use: When you want to take advantage of increasing prices 

Risk and Profit: The potential profit is theoretically unlimited, and the potential risk is whatever the premium of the contract paid is. 

Covered Calls

Sentiment: Neither bullish nor bearish 

When to Use: When you are looking to add downside protection in exchange for limited reward potential. 

Setup: Buying 100 shares of the stock, and selling a call option for the same shares. 

Risk and Profit: Profit is limited, and while risk is limited, it can be substantial. 

Long Puts 

Sentiment: Bearish 

When to Use: When you want to take advantage of falling prices, and want less risk than short-selling. 

Risk and Profit: Potential risk is limited to the price of the contract. Potential profit is significant, but not unlimited, since the stock cannot go below a $0 price. 

Protective Puts

Sentiment: Bullish

When to Use: You own the stock and want short-term downside protection 

Setup: You own the stock, and buy puts to protect your position in the short-term. Some see this as an “insurance strategy” for your positions. 

Risk and Profit: If the price is the same or increases, the loss will be your options contract premium. If the price of the stock decreases, your loss will be limited to the stock price minus the strike price, plus the premium for the contract. 

Read More: How to Find Unusual Options Activity 

Find Options Trades in Benzinga Pro 

BZ Signals 

BZ Signals is one source in the Benzinga Pro Newsfeed. Select the BZ Signals source to get a stream of options trades and block trades. Click on the details tool to see if there are more under that stock, or any news catalysts to be aware of. 

Unusual Options Activity Add-On 

This premium add-on allows you to add premium unusual options activity data into Benzinga Pro. It is currently available for the Signals and Calendar tool. The unusual options activity in the Signals tool detects large and aggressive unusual options trades. Set up alerts to be notified whenever a big options trade occurs. 

The unusual options activity in the Calendar tool gives you a historical look at unusual options activity over time. 

Both the Signals and Calendar tool allow for customizable filtering so you can customize it to your trading strategy. 

Read More: How to Find Options in Benzinga Pro 

Looking for Options Suggestions?

If you’re looking for us to do the work for you, check out the Benzinga Options Newsletter with pro options trader Nic Chahine. You’ll get two options recommendations each month, complete with analysis. Click here to learn more and get started. 

Disclaimer: Benzinga is a news organization and does not provide financial advice and does not issue stock recommendations or offers to buy stock or sell any security. Benzinga Pro is for informational purposes and should not be viewed as recommendations. Benzinga Pro will never tell you whether to buy or sell a stock. It will only inform your trading decisions. You can find our full disclaimer located here.