Investors use stock options as a hedge against the price of a stock declining, to lock in a future purchase price, or to speculate on the future price of a stock. Stock options are important in the market and provide investors with extra opportunities that could lead to higher returns in the stock market.
The use of stock options is on the rise because of their benefits, and promise for reasonably fast financial profit. One interesting thing about stock options is that you can realize a profit whether the stock goes up, remains still or goes down.
The problem with stock options, however, is that they expire. And this expiration may occur before market conditions allow a profit. Most options have a life of 6 months, and then expire. On the other hand, owning a stock which does not expire, versus a stock option that does, minimizes the risk that the stock will become worthless.It is important for investors to determine how much of their portfolio will go into stock options, and a general rule is that 10% should be the maximum.
There are two major types of stock option contracts called puts and calls, and each gives the owner certain rights. With “call” options the owner can buy a stock for a fixed price, called the strike price, within a limited period of time. The buyer of the call has the right to purchase shares of the stock at the strike price and the seller has the obligation to sell at that price. A “put” option is the opposite of a call. This contract allows the owner to sell underlying stock at a given price on or before the expiration of the contract.
Many traders use stock option software to help analyze the potential direction of stock movement, This can be done far more quickly than with older methods. The formulas for making calculations are the same, but can be carried out at lightening speed. Stock option software can also keep track of the portfolio, with programming to give automatic warnings of when stop loss points are reached.
Generally speaking, stock option trading is not advisable for those without prior experience in the stock market. By jumping in unprepared or inexperienced there is a good chance you will loose more than you will make.But doing your homework and starting with the basics allows any investor the chance to play in this complicated game and profit.
DS Jones