More than 15 years ago, I studied for and passed the General Securities Representative Exam. It’s more commonly known as the Series 7. It’s the test all brokers must take and pass.
It’s a serious test that takes six hours to complete. It covers nearly every type of security, including stocks, bonds and options.
The options section of the test was the most intimidating to me. And guess what: I wasn’t alone.
Options have a bad reputation, and most investors tend to avoid them. So it’s not surprising that 60% of Wealthy Retirement readers surveyed have never traded options before.
Almost 18% of our respondents see options as risky investments. And 54.5% said investors avoid them because they don’t fully understand what they are.
Soon after passing the Series 7, I figured out that those views on options were completely wrong. Options are easy to understand, and trading them can be quite profitable. All you need are six options basics to get started.
Your Options Starter Kit
Option: Options are contracts that give the owner of the option the right to buy or sell an underlying stock at a predetermined price on or before a specified date.
Exercise: Using the option contract to buy or sell the stock at the particular price.
Strike Price: The price at which you agree to buy or sell the stock.
Expiration Date: The last date on which the option holder may exercise the option according to its terms.
Call: A type of option that gives the owner the right to buy a stock at a specific strike price and expiration date. Remember, a call option gives you the right to buy a stock, but you don’t have to buy it.
Put: A type of option that gives the owner the right to sell a stock at a specific price and expiration date. Remember, a put option gives you the right to sell a stock, but you don’t have to sell it.
Once you’ve mastered these six terms, you’re ready to dip your toe into options.
First, you’ll need to get approval to trade options in your brokerage account. Don’t worry – getting approval isn’t hard. Your brokerage firm will walk you through the process.
Once your account is clear, you’re ready to start researching and testing options strategies to boost your investment income.