Options trading is complex and risky for most individual investors. Learn the basics of calls and puts, why most options strategies underperform simple index investing, and the one strategy worth understanding.
Options are financial contracts that give the buyer the right (but not the obligation) to buy or sell an asset at a predetermined price before a specified date.
This guide is for freelancers curious about options, not a recommendation to trade them. Options are complex instruments appropriate only for investors who fully understand the risks.
Call option: Gives you the right to buy 100 shares of a stock at a specified price (strike price) before expiration. You buy calls when you think the stock will rise significantly.
Put option: Gives you the right to sell 100 shares at the strike price before expiration. You buy puts when you think the stock will fall or as insurance against stocks you own.
70-80% of options expire worthless. For every trader who profits, there is typically a market maker or institutional investor taking the other side with sophisticated tools and information advantages.
For most freelancers, options are unnecessary. A three-fund index portfolio dramatically outperforms the average options trader over time.
If you own shares of a stock or ETF, you can sell covered calls against your position to generate additional income. This is lower risk than buying options because you are selling, not buying.
But this strategy also caps your upside. Index funds without covered calls are simpler and often more effective.
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