When it comes to options trading, one of the most common questions that arises is whether you need to own 100 shares of the underlying stock to buy or sell options contracts. The answer is no, you do not need to own the underlying stock to trade options Options contracts are independent of the underlying stock, meaning you can buy or sell options without owning any shares.
However, it’s important to understand the implications of trading options without owning the underlying stock. When you buy a call option, you are essentially buying the right, but not the obligation, to buy 100 shares of the underlying stock at a certain price (the strike price) on or before a certain date (the expiration date). If the stock price rises above the strike price, you can exercise your option and buy the shares at the lower strike price, potentially making a profit. If the stock price falls below the strike price, your option will expire worthless, and you will lose the premium you paid for the option.
Similarly, when you sell a call option you are essentially selling the right to someone else to buy 100 shares of the underlying stock at a certain price on or before a certain date. If the stock price rises above the strike price, the buyer of the option will exercise their right to buy the shares from you at the lower strike price and you will be obligated to sell them the shares. If the stock price falls below the strike price, the option will expire worthless, and you will keep the premium you received for selling the option.
It’s important to note that selling options, also known as “writing options,” is a more advanced options trading strategy that carries significant risk. If you sell an option and the stock price rises above the strike price, you could be obligated to buy or sell the shares at a price that is unfavorable to you, potentially resulting in a significant loss.
Here’s a summary of the key points:
- You do not need to own the underlying stock to trade options.
- Buying a call option gives you the right, but not the obligation, to buy 100 shares of the underlying stock at a certain price on or before a certain date.
- Selling a call option gives someone else the right to buy 100 shares of the underlying stock from you at a certain price on or before a certain date.
- Selling options is a more advanced options trading strategy that carries significant risk.
Additional Considerations:
- Margin requirements: When you buy or sell options, you will be required to maintain a certain amount of margin in your account. The margin requirement is a percentage of the total value of the options contract.
- Assignment risk: If you sell a call option and the stock price rises above the strike price, you may be assigned, meaning that the buyer of the option will exercise their right to buy the shares from you.
- Early exercise: In some cases, the buyer of an option may choose to exercise their option before the expiration date. This is known as early exercise.
Trading options can be a complex and risky endeavor. It’s important to understand the risks involved before you start trading options. If you are considering trading options, it is recommended that you consult with a financial advisor to discuss your investment goals and risk tolerance.
What Are the Two Main Types of Stock Options?
A call option or a put option are the two options available to investors when trading stock options. An investor in a call option makes the assumption that the price of the underlying stock will increase. A put option represents a bearish position, with the investor speculating that the price of the underlying stock will drop. Contracts for options are bought that are equivalent to 100 shares of the underlying stock.
Trading Stock Options
Buying or selling options is contingent upon the trading strategy employed by the trader. Using the previous example, a trader may decide to buy the call or sell or write the put if they believe that IBM shares are going to rise. In this instance, the premium would be received by the put seller instead of being paid. Five IBM January $150 puts would fetch $500 from a seller.
In the event that the stock price rose above $150, the option would expire worthless, allowing the put seller to keep the entire premium. The seller would have to purchase the underlying stock at the $150 strike price, though, if the stock closed below that amount. In that scenario, the trader would lose both the premium and additional capital because, even though the stock is now owned at $150 per share, it is still trading at lower levels.
Another popular equity options technique is trading option spreads. To profit from option premiums with the least amount of risk, traders combine long and short option positions with varying strike prices and expiration dates.
Do You Need To Own 100 Shares Of Stock Before Trading Options? [Episode 363]
FAQ
Do you need 100 shares to do options?
Do I have to buy the shares of stock with options?
How to trade options without buying 100 shares?
How many shares do you need for options?