Options are a great instrument that each investor should educate themselves on. Learn how to trade options in our lifetime options course. [youtube:v7vVkKYtSwI;San Jose [link:Options Course] and Mentoring Program;http://www.youtube.com/watch?v=v7vVkKYtSwI&feature=related]

Options were developed as a way of curbing and managing chances when investing. So, do not pay attention to what you may have been told about options. Well, some of it’s true and some of it’s just ignorance. Let’s talk about some option basics.

Investors use options for two main reasons. The first is to speculate. The second is to hedge their risk. Most are familiar with the guessing aspect of investing. Each time you buy stock, you are guessing which direction the stock is going to go in. The term investing is used to make buying stock not sound as risky. Truthfully, there is always uncertainty when buying stock. You might be pretty sure that GOOG stock is going to go up when you buy it, but if you were positive that it would increase, you would put everything you owned into it. It is important to realize that there is always a risk involved when investing. When you buy options, you guess on future stock prices, but you limit the downside risk while your upside profit potential is not limited.

Investors can choose to hedge their portfolios. Basically, the investor is purchasing insurance that will protect their investment from potential disaster. It is very similar to buying homeowners insurance. The chance of something bad happening is slim; however, having someone else bear the brunt of the disaster is more appealing than dealing with it yourself. When you hedge your portfolio, you are insuring your investment.

The prices of options are based on the price of an underlying stock.

After you decide whether you want to hedge or speculate with your options, you will also need to decide which certain options fit your needs. When you look up an options chain, you will discover that there many to choose from. Knowing that you want to hedge or speculate is not enough. You also need to decide if your plan calls for trading a put or a call option, how long you want the expiration date to be, along with what strike price you want to trade. This all sounds Greek if you are new to options, but after a while this all becomes second nature.

The pricing of options is figured using a complicated differential equation, but again, we don’t need to make this so complicated.

There are five necessary pieces of evaluating costs of pricing options. They are: Asset volatility, Underlying Asset Price, Time to Expiration, Option strike price and Risk-free rate.

There are many factors that play an important part in every option price, but there are only two features that an investor can control, and they are the time to expiration and the strike price. Traders need to focus on choosing the right strike and expiration for them. There are several strategies that all should consider:

Hedging: a simple strategy to protect the downside of the market is something like a longer expiration and using puts on out of money options.

Speculating: using directional or non-directional option strategies to make huge returns usually quickly while taking on some risk.

A variety of strategies are part of the out or in the money options that every investor should learn. An in the money option is going to cost more money to purchase but, the chance that it will retain value upon expiration is higher. An out of the money option is less expensive but there is a greater risk of it being worth nothing upon expiration.

Learn how to trade options with our lifetime options course. Options are a strong instrument and something which every investor should get the inside scoop on options learning .

Comments are closed.