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| | | Basics of Options Profitability | | As we mentioned in our last email, someone who buy options are holders, while people who sell options are called writers. It's also worth mentioning that when you see an options contract, that contract will also come with a strike price. A strike price is the set prices at which a contract can be bought or sold. | | A call option holder makes a profit if the asset, in this case a stock, rises above the strike price before the option expires. A put option holder makes a profit when the stock falls below the strike price before the option expires. | | A call option writer makes a profit when the stock stays below the set price below the strike price. Meanwhile, a put option writer profits if the price stays above the stock price. | | As an example, back in March, you may have heard about GME contracts set at $800. That means that the contract has a strike price of $800. If a call option holder, or a put option writer, wanted to make a profit off such a contract, the stock price would have to hit $800 and stay above $800 (spoiler alert: it didn't). If a put option holder, or call option writer, wanted to profit off the contract, then the stock would have to stay below $800, which it did. | | Risk Tolerance | | When you are deciding between becoming an options writer or options buyer, you must factor in your risk tolerance. We've talked about risk tolerance in our past emails, but to recap: a high risk tolerance means that you are willing to lose more of your initial investment in order to gain a greater amount of money. A low risk tolerance means you are willing to gain a smaller amount of money in order to lose less of your initial investment. | | If you were to become an options holder, you would be someone with a low risk tolerance. Let's say you buy one call options contract at $100. The most money that you can lose is the $100, no more than that. However, there is no limit as to how much you can gain. The only catch might be that the trade doesn't have a high probability of being profitable. In the end, it all depends on market voltaility. | | On the other hand, if you were to write one call option contract at $100, the most money you can win is $100. However, there is no minimum amount on what you can lose. Like with options holding, the amount you can lose depends mostly on market volatility. | | | | | | |
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