Are you tired of investing in boring, old stocks and bonds? Have you been searching for a way to spice up your investments? Search no more, friend. The right option for you is—well, options.
Unlike stocks and bonds, options are a derivative financial product. Derivatives are financial securities that derive their value from an underlying asset or assets. The value of options is derived from the opportunity for the contract holder to buy or sell an underlying asset at a specified price over a certain period of time.
There are two different types of options: call options and put options. Call options allow the holder to buy the underlying asset at a certain price over a limited amount of time. Put options, on the other hand, allow the contract holder to sell the asset at a specified price over a period of time. The specified price is called the “strike price,” and the time by which the holder must exercise their option is called the expiration date. An option contract holder is not obligated to exercise their option.
Options Speculation
A trader will buy options depending on how they anticipate the price of the underlying asset to change in the future. For example, if a trader speculates that a stock’s price will go up in the future, they might purchase a call option that has a strike price lower than what they anticipate the price to be. If they are correct in their speculation, they can then sell the call option for the difference between the strike price and the market value.
Investment Hedging
Investors can use options to protect their portfolio from loss. For example, if an investor holds stock that they believe will increase in price, but they fear it may depreciate, they can buy put options to sell the stock at a strike price that will mitigate their losses if the stock price drops precipitously. The price of this hedge is how much the cost of the put option is per share against whatever the increase is in the individual share price.
Options Profitability
An options trader can either buy options or write options. If a trader buys an option, it means they are buying the right to either buy or sell the underlying asset. If someone is selling (or “writing”) an option, it means they are agreeing to either buy or sell the contract holder the agreed upon amount of assets at the strike price.
It is important to distinguish between “exercising” an option and buying an option. To exercise an option means to exercise the right the options allow the holder to buy or sell the assets at the strike price, but in order to do this, the holder must have the money to actually buy the assets at the price or must actually have the contracted amount of assets to sell.
Are options right for you?
Options are a versatile security. No matter the state of the market, there is likely an options strategy designed to take advantage of it. However, there are certain types of options trading that are extremely high risk and are best left to the most sophisticated, risk-tolerant traders. If you’re interested in options, speak with your financial professional about your own risk tolerance to see if they’re right for you.
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https://www.investopedia.com/terms/d/derivative.asp
https://www.investopedia.com/terms/o/option.asp
https://www.investopedia.com/ask/answers/06/speculateoptions.asp
https://www.stockinvestor.com/37156/hedging-option-trading/
https://www.investopedia.com/options-basics-tutorial-4583012
https://www.investopedia.com/articles/active-trading/091714/basics-options-profitability.asp
