Why It Is Too Risky For Investors And Traders Not To Use Tried Investing In Trading Options?
Options are one of the most powerful tools available for both investors and traders
. For decades now, the average investor has been told by "industry professionals", that options are too risky and should not be considered as part of an investment portfolio.This information is not only inaccurate, it verges on being irresponsible advice given by these so-called "industry professionals".
It is my opinion, and no doubt that of anyone who has an in-depth knowledge of options, that the opposite is true - it is too risky for investors and traders not to use options!
In this article, I would like provide you with a crystal clear definition of what an option is and the two different types of options available, so that you will understand that they can be used to not only generate income but also to protect a portfolio of shares.
So what is an option?
An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date.
In its simplest explanation, an option contract is a contract between two people, to buy and sell shares (or an index).
It is a derivative ... that is; it derives from an underlying asset.
For example; two people might establish an option contract over shares in a listed company such as Microsoft (MSFT). Both parties have different reasons for entering the contract, with one purchasing the contract and the other selling the contract.
Option contracts are used for numerous strategies:
1. Long-term investors protecting their stock portfolio;
2. Short-term Traders benefiting from directional movement;
3. Multi-leg strategies profiting from volatility movements within the market; and
4. Off-setting positions in different sectors/markets.
Option contracts are standardized: That is, they have a set stock value, for a set number of Shares, and the contract ends at a set time. They are traded on an exchange which is governed by standardized rules and regulations.
The buyer and seller agree that the contract will be at a set value (in the same way that stock prices are agreed upon in the open market).
The number of shares and the date the option ends are standardized by the Options Clearing House (for Australia), or the Options Clearing Corporation (for the United States).
There are two types of option contracts: Call options & put options
A call option is: the right to buy stock, but not the obligation, at a specified price on or before a specified time.
A put option is: the right to sell stock, but not the obligation, at a specified price on or before a specified time.
Call option contracts can be used as an alternative to buying shares. When the share price rises, the call option also rises.
However, because the option is at a lower value to the stock price, the option contract increases at a higher leveraged value.
Investors can also use call options as a means to generate an additional income with an existing (or newly purchased) stock position. This technique is similar to the purchase of property which is then rented out to tenants.
On the other hand, put option contracts can be used as a means to protect a portfolio of shares. The put option buyer has the right to sell their shares, no matter where the share price is at.
Therefore, if the share price has fallen, the put option can be exercised and the shares are sold at the exercise price of the contract.
So in summary, options are one of the most powerful tools available for both investors and traders and in my opinion it is too risky for investors and traders not to use options!
Furthermore, I believe that these so-called "industry professionals" should, rather than advising their clients that trading options are too risky, be advising their clients to become more educated in this field, so they can not only generate additional income but also protect their share portfolios.
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