You'd earn $4 per share if you exercised the contract instead of selling it. The reason the contract is worth at least $5 is that you could exercise the contract to buy the shares at $10, then sell the stocks in the market at their current trading price of $15. Great! This means you can sell the contract in the market for at least $5 per share and earn at least a $4 profit per share. The product release gave the stock a bump, and the day your contract expires, MEOW hits $15. From there, you can sell the stocks back into the market at their current market value if you so choose.įor example, you think MEOW's upcoming product release is going to send the price of the stock soaring, so you buy a call for MEOW at a $10 strike price with a $1 premium (the cost of the contract) expiring in a month. Buying a call gives you the right to purchase the underlying stocks from the option seller for the agreed-upon strike price. In this case, you could buy to open a call position. What if you think the price of the stock is going up? Want to learn more before diving in? Our Options Knowledge Center explains terminology, basic and advanced trading strategies, and how to place an options trade on Robinhood. Trading options requires approval on Robinhood, and it isn’t appropriate for everyone. When trading options, potential losses can accrue at a much faster rate, and it’s possible to lose your entire initial investment (or more). However, it’s important to note that trading options is generally riskier than investing in stocks. Others may use options to pursue additional income by monetizing the stocks they own. Some people use options to hedge the risk of losses (for instance, helping protect the value of their portfolio from a downturn). Generally speaking, options are quite flexible, and they can be used in different ways depending on your goals. On Robinhood, options contracts are traded on stocks and ETFs. These contracts are part of a larger group of financial instruments called derivatives. An option is a contract between a buyer and a seller, and its value is derived from an underlying security.
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