Trading Stocks
In one of the BetterTrades options trading classes, students learn that unlike stocks, which are sold in individual shares,
options are sold in contracts. One contract equals 100 shares. An investor cannot buy 53 options on a stock; options must
be bought in bundles of 100.
Finding the price of the option is similar to finding the price of a stock. There is a bid price and an ask price. You
buy at the ask price and sell at the bid price.
Options are sold as calls (if you believe the stock is going up) and puts (if you believe the stock is going down.)
For example: You are bullish on a stock. The call option has a bid price of $2.30 and an ask price of $2.60. You will pay
$2.60 per share, or $260 per contract, to purchase the option. If you bought 10 contracts, the cost would be $2,600 and
you would control 1,000 shares of the stock.
If the stock price goes up, the option price will also increase. In a week your option may have a bid price of $3.50 and
an ask price of $4.10. If you decide to exit the trade, you sell at $3.50 or $350 per contract. That is a $90 profit per
contract. If you had 10 contracts, your profit would be $900.
What if your call option loses value? Perhaps your bullish stock had a mind of its own and went the other way. A week
later you decide to exit the trade because the bid price is now $1.90 and the ask price is $2.20. You sell your position
at $1.90 or $190 per contract, a loss of $50 per contract.
Buying a put works the same way in reverse. You want the stock price to go down and your profit increases as the price
falls. Puts can be a great way to make money in a bearish market. It's another tool available from the Better Trades stock
option education system.
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