December 31, 2020 Last updated December 31st, 2020 1,820 Reads share

Option Premiums: How You Can Benefit From Selling Options

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As you join the world of trading options, you start realizing day after day that things are much more complicated than they might have sounded at first. Yet, you are certainly up to the task, especially if you are willing to increase your knowledge and improve your skills over time. This is completely logical, isn’t it? After all, every single business requires you to be ready to learn and improve instead of simply stagnate.

If you are ready to do the necessary learning and thus stop stagnating, you should start by figuring out everything you need to know about options in the first place. As explained by this useful source, there are a lot of factors to learn about here, starting with getting familiar with all the right terms in the world of options trading. So, in case you feel like you have any gaps in your knowledge, I suggest you brush up on things and make sure to fill those gaps because you’ll need all the info you can get if you want to have success in this market.

What Are Options?

Since I am talking so much about the necessity of knowing the basics before moving on to some more complicated things, it’s only fair of me to remind you about some of those basic things. So, before we get to explaining how you can actually benefit from selling options, as well as what premiums are, let us first take a look at the very basic idea behind this concept. In other words, let’s remind everyone what options actually are.

Let us keep it as short and as precise as possible. Options are securities that fall in the category of derivative securities thanks to the fact that they are either linked to or derived from another price. These are sold on the exchange and their prices are, unsurprisingly, dependent on the prices of those securities that they had previously been derived from.

When buying these securities, you are basically buying the option, or the possibility to either buy or sell an underlying stock at a specific price. I suppose things are perfectly clear now, aren’t they? So, what if I asked you which types of options there are? Would you be able to answer it, or would you look at me with a puzzled expression on your face?

Just in case a puzzled expression is what I would be greeted with, let me remind you of the two types you absolutely have to know about. Those are calls and puts. Put options provide you with the right, but not with the obligation, to “put” the underlying stock to someone at a previously set price. Call options, on the other hand, provide you with the right, but not with the obligation, to “call” in a security at a previously set price.

When dealing with these particular securities, there is always a way to be more secure in the moves you are making. The trick is in getting properly informed, as well as using certain programs and tools that might be of help. Of course, your task is to find a reliable source of information and learn everything you need to know about the process. As you can see if you visit, there are certainly a lot of things you have to learn and a reliable source is of utmost necessity.

How Can You Benefit From Selling These?

There is a saying in the trading world that is closely connected to these specific securities. Basically, that saying explains that options are actually made to be sold. That seems to be their sole purpose and that seems to be why sellers are always happy to benefit from these types of sales. If you aren’t sure how you can actually benefit from selling these, I suggest you keep on reading.

As you will soon understand, things aren’t as complicated as they might seem right now. Sellers benefit from selling these securities because they collect the option premium upfront. When doing this, sellers hope that the option declines in value over time, because that means that they will benefit. Of course, if this decline happens, those same sellers can book an offsetting trade at a much lower premium, which is definitely a profitable situation.

Nobody can deny the fact that this can be a bit risky. Then again, everything is risky when it comes to trading, isn’t it? People enter all kinds of deals and investments with the aim of making a profit and all of those deals and investments carry at least a certain amount of risk. Nothing is 100% sure and selling these securities in order to collect premiums can turn out to be a wrong move if there is no exit strategy or a hedge.

What Are Option Premiums?

I get that the terms in this world might all be a bit confusing, which is why you are probably now wondering what option premiums actually are, and I’ll provide you with an explanation. If you remember what I have been saying above, then you know that the seller gets paid something after selling this particular security. That something is called an option premium and it consists of intrinsic and extrinsic value. Those known as “out-of-the-money” premiums, however, consist only of the extrinsic value. In any case, premiums are incomes received by the seller of this specific security.

People tend to make a mistake when calculating these costs, simply because they aren’t that well versed in the whole concept of options and premiums. When entering the trading world, though, you need to ensure that you will repeat no such mistakes, meaning that you will have to learn how to calculate these prices. It certainly isn’t that difficult, but people sometimes fail to take one thing into consideration, which is what leads them to the wrong price. Simply said, you need to keep in mind that premiums are usually quoted on a per-share basis and contracts are typically made for 100 shares of the underlying stock.

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Deo Fuerte

Deo Fuerte

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