There Are Three Good Ways to Buy Options

According to Wikipedia, an option is a contract which gives the buyer the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price prior to or on a specified date, depending on the form of the option.

When you buy equity options there is no commitment required to buy the underlying equity. This means your options are open.

There are three ways to buy options:

Hold them until they mature and then trade them. Hold onto the options contracts until the end of the contract period and prior to expiration, exercise the option at the strike price.

The reason for making a move like this is be imagine buying a Call option at a strike price of $35. The market price of the stock increases and by the end of the option contract period, it is now at $45. You can exercise your Call option at the strike price of $35 and also benefit from a $10 profit a share before you subtract the cost of the premium as well as commissions.

Another method is to trade the options before the expiration date. Imagine buying a Call option again that has a strike price of $35. After a while, the stock increases to $40. You don’t think the price will head much higher and it may even drop. You can exercise your Call option right away at the strike price of $35 and benefit from the $5 a share profit before you subtract the cost of the premium and the commissions. The last possible move is to let the option expire. You notice the underlying stock price keeps falling. If you do nothing, at the expiration you will have no profit and the option will be considered worthless. Your loss however is limited to the premium that you paid for the option and commissions.

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