James back again. The last few posts dealt with using stock options for defensive purposes. This mean that you used them in order to protect your portfolio against potential loss — not to make additional money by trading options. The other use for stock options is termed to be “speculative” — meaning that you are buying a call or put option in order to profit off of the trade. When you think a stock is going to go up a lot and quickly, then buying a call option on it is the way to maximize your profits. Conversely, if you believe that a stock will decline rapidly, then purchasing a put option is the best way to profit. Put options are also safer than selling short a stock which you are bearish on — short selling can entail unlimited losses. A put option only subjects you to the loss of the amount paid to purchase the put.
I should make it very clear — both call and put options are very risky. The odds are that you will lose all of your investment into them. However, in the instances where your thesis proves correct, options can pay off hugely. It is highly advised that you trade options on a practice account for several months and study them well — prior to risking actual money on these trades. Adding put and call options into your trading arsenal allows you to capitalize on situations where you’re either exceedingly bullish or bearish on the prospects of a given company. However, as indicated, make sure you fully understand how stock options work prior to entering this highly risky arena.