Getting a Grip on Options

 Getting a Grip on Options

Options are a complex and sometimes misunderstood financial vehicle, but they offer a wealth of opportunities to individual investors who take the time to learn them. Options are a great way to hedge your bets and also a great way to gain cheap stock in a firm and potentially reap enormous gains. Plus, there is really little danger when you buy options. Even if an option transaction bombs, you'll only lose the money you put in plus any fees you paid.

Which leaves us with what? The right to purchase or sell an underlying securities at a certain price for a predetermined period of time is granted to you as an investor in the form of an option.

If you want to wager on the future of a stock, you can do so with options, but you're only able to do so for a set amount of time (anything from one month to three years varies by option). So that you can understand how options can result in increased profits with minimal risk, let's go through a couple of instances using different circumstances.

Consider the possibility that you think Valero's stock will rise due to the refinery industry's demand for gas. You can guarantee that the market will be taken aback by the company's earnings beat their quarterly earnings projection when the stock's earnings report is released in June.

Here, you should seek out opportunities to purchase "call options" on Valero. Buying call options is a way to wager on an increase in the value of the underlying stock. Conversely, put options wager that the price of the underlying securities will decline.

It is prudent to provide yourself sufficient time to confirm your trade prediction, but not so much time that the prediction becomes prohibitively expensive to implement. We call options "wasting assets" since their value depreciates as time passes.

Additionally, the premium will be higher the longer the period before the option expires. One must pay a premium in order to acquire the option. A low premium indicates an inexpensive alternative, while a high premium indicates an expensive one. Similar to stock prices, option premiums are dictated by market forces. A stock exchange is similar to how options are traded.

Additionally, options are subject to expiration every month on the third Friday. An example scenario would be to purchase an option with an expiration date the following month if Valero's profits are expected to be revealed in the final week of June. Consequently, if you want to profit from a rising Valero stock price, you should definitely purchase a July call option. An options position is considered profitable when it is "in the money." On the other hand, a deal that loses money is called "out of the money," while a trade that makes a profit is called "at the money."

When you sell the option, how much would you have to pay for it for it to be considered "in the money"? Imagine for a moment that the stock price of Valero is hovering around $60. When the earnings report comes out, you expect it to rise by around 10%. In other words, you anticipate a stock price increase to $66. You notice that there are two different strike prices available for the July Call options on Valero: $60 and $65 respectively. With that being said, you elect to purchase the 60 July Call option from Valero.

The $60 mark represents the option's strike price, the point at which the underlying stock can be bought or sold.

Considering how few people are rooting for that wager, the option is reasonably priced at about $1. Options can only be purchased in 100-unit increments. The cost of an option contract would thus be $100. A $500 premium would be yours if you were to purchase five contracts. Fifty shares of stock are controlled by that $500. Put it in your mind. Using options, you could acquire 500 shares of Valero stock at $60 each, for a total of $30,000 (leverage!).

You can never lose more than what you put into an option, which is another perk of investing in options. You will only lose the option premium and any applicable trading fees if the deal goes south. But if everything works out, you can triple your gains with a little shift in the underlying stock price thanks to options' leverage.

Options have several potential applications in strategy, but perhaps the most essential is that they limit your risk to the cost of the option while granting you cheap control over blocks of stock. When coupled with solid directed methods and systems, options exploited in this manner have the potential to provide enormous returns.

Location:

Share :