AARP Getting Started in Options by Michael C. Thomsett

By Michael C. Thomsett

AARP electronic versions give you useful advice, confirmed suggestions, and professional tips.

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Seller an investor who grants a right in an option to someone else; the seller realizes a profit if the value of the stock moves below the specified price (call) or above the specified price (put). 1 The call option. • Seller of a call: When you sell a call, you hope that the stock will fall in value, because that will result in a corresponding decrease in value for the call. This will create lower market value for the call, which can then be purchased and closed at a profit; or the stock can be sold to the buyer at a price above current market value.

Whether you are seeking a broker or using one already, that broker should not give the same recommendations to everyone; advice should be matched to specific risk levels and experience. Brokers are required by law to ensure that you are qualified to invest in options. That means that you should have at least a minimal understanding of market risks, procedures, and terminology, and that you understand the risks associated with options. Brokers are required to apply a rule called know your customer.

The nature of options is that it takes time to think about the strategies and to come to conclusions. This is why trying out strategies with paper trading (a technique of hypothetical trading) is valuable. It enables you to learn about how a specific trade works using real contracts and stocks, but without risking actual money. Set a goal for yourself to learn how to best use this growing, exciting, but complex field, in four stages:1. Master the terminology of the options field. Of course, you cannot simply memorize definitions without a context, which is why all of the terms you need are defined as they are introduced.

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