How options work

Let's look at a typical example.

You're bullish gold and want to play this market using options. It is January, and the price of gold is $400 per ounce. You're a bull, remember, so you can employ two basic strategies: You can either buy a call option or sell a put option. However, other decisions need to be made. It's like the kid who goes in to buy his first pack of cigarettes. The clerk asks him which brand he wants. The kid asks for Marlboro. Standard or Menthol? Standard. 100s or shorts? Shorts. Box or soft pack? Box. Lights or Regulars? With his head spinning, the kid runs out of the store rationalizing that cigarettes aren't ...

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