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Stock Options 101: What You Need to Know Before Trading
There are huge potential gains to options trading, but lots of risk as well
Options trading has exploded this year. According to The Wall Street Journal, going back to 1973, the inception of organized options trading on the Cboe (pronounced “see-bo” and originally known as the Chicago Board Options Exchange), nine of the ten most active call-options trading days have occurred in 2021. On an average day this year, 39 million option contracts have changed hands. This year, options market activity in the U.S. is on track to exceed stock market activity for the first time ever. Lots of investors are jumping in and experiencing the thrill of options trading — are you one of them, or do you want to be? If so, it pays to step back to understand what options are all about — what drives their prices? How risky is options investing? I’ll give you a quick primer by explaining what options are, and how options are priced. I’ll introduce you to the well-known Black-Scholes options pricing model. I’ll use Tesla options as an example of pricing. And I’ll give you some things to consider before diving in to the world of options trading.
Option Basics
There are two main types of options: calls and puts. A call option gives the holder the right (but not the…
