- 1). Understand what an option is. A call option gives the owner the right, but not the obligation, to purchase an asset in the future at a predefined price. A put option gives the owner the right, but not the obligation, to sell an asset in the future at a predefined price. Option prices thrive on volatility in the market. The more volatility in the market, the higher the likelihood that your option will hit its strike price (the price you believe it will go to).
- 2). Look up options prices for a security. Let's use General Electric as an example. The ticker symbol for General Electric is GE.
- 3). Go to Yahoo! Finance. Yahoo! Finance was rated the top investment research site (by hits) by Alexa.com. Enter the ticker symbol GE into the quote box and click Get Quotes.
- 4). Click on the word Options in the left pane. On the top of the screen are prices for call options and on the bottom are prices for put options. You can view option prices for the current month or future months by selecting a month at the top of the chart.
- 5). Walk through an example. If you believe the current market volatility will lead to lower prices, purchase a put. If you believe the current market volatility will lead to higher prices purchase a call. The closer your strike price is to the current price, the higher the price of the option and the more likelihood that the strike price will be hit.
- 6). Purchase two option contracts for GE to continue the example. Assume GE is trading at $10 a share. You believe this a low price, so you purchase two call contracts on GE. The current price of the option is $2 dollars per contract (each contract represents 100 shares) at a strike price of $12. This will cost you $4 as opposed to $200 if you were to purchase 200 shares outright at a price of $10. The more volatility in the market, the more likelihood that your strike price will be hit. However, if the strike price isn't reached by the expiration date, your option will expire worthless and you will lose your entire investment. This is what makes options so risky.
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