As an investor, you have many options when it comes to trading. You can trade stocks, bonds, mutual funds, futures, and more. But what if you want to trade options?

Options are a derivative, which means they derive their value from an underlying asset. The most common underlying assets are stocks, but options can also be based on commodities, currencies, and other derivatives.

Options give you the entitlement to buy or sell an underlying asset at a specified price within a specific timeframe. This flexibility makes options a popular choice among traders. Check Saxo to start your options trading journey today.

Buying Call Options

You can use a call option to buy an underlying asset at a specified price within a specific timeframe.

For instance, let’s say you buy a call option on ABC stock with a strike price of $50 and an expiration date of December 21; you have the right to buy 100 shares of ABC stock at $50 per share anytime between now and December 21.

If the stock price rises above $50 per share, you can exercise your option and buy the shares at $50 even though they’re worth more, which is how you make money from buying call options.

In contrast, if the stock price falls below $50 per share, you can let the option expire worthlessly and lose your entire investment.

Buying Put Options

You can use a put option to sell an underlying asset at a specified price within a specific timeframe.

For example, let’s say you buy a put option on ABC stock with a strike price of $60 and an expiration date of December 15; you have the right to sell 100 shares of ABC stock at $60 per share anytime between now and December 15.

If the stock price falls below $60 per share, you can exercise your option and sell the shares at $60 even though they’re worth less, which is how you make money from buying put options.

In contrast, if the stock price rises above $60 per share, you can let the option expire worthlessly and lose your entire investment.

Writing Call Options

Writing or selling a call option is similar to buying a put option. It’s a way to speculate on a stock price falling.

For example, let’s say you write a call option on ABC stock with a strike price of $90 and an expiration date of October 20; you are obligated to sell 100 shares of ABC stock at $90 per share anytime between now and October 20.

If the stock price falls below $90 per share, you can let the option expire and keep the premium as profit.

In contrast, if the stock price rises above $90 per share, you will have to sell the shares at $90 even though they’re worth more, which is how you lose money from writing call options.

Writing Put Options

Writing or selling a put option is similar to buying a call option. It’s a way to speculate on a stock price rising.

For example, let’s say you write a put option on ABC stock with a strike price of $30 and an expiration date of November 12; you are obligated to buy 100 shares of ABC stock at $30 per share anytime between now and November 12.

If the stock price rises above $30 per share, you can let the option expire and keep the premium as profit.

In contrast, if the stock price falls below $30 per share, you will have to buy the shares at $30 even though they’re worth less, which is how you lose money from writing put options.

Benefits of using these methods

You can make money in fluctuating markets

When buying a call option, you profit when the underlying asset’s price increases. In contrast, if you buy a put option, you profit when the underlying asset’s price decreases. And if you write options, you can profit whether the market goes up, down, or sideways.

You control a large number of shares with a small amount of capital

Options allow you to control 100 shares of an asset for a fraction of the cost of buying the actual shares outright, which is why options are said to have high leverage.