What are Options


Options are a part of the world of investment that provides financial risk takers the opportunity to invest their money into specific ventures. Most investment opportunities involving options are fairly sound. Also, there are many investors that add an option element to their portfolios. The following material will explain what options are and how they can benefit a person when they are willing to use them as a part of their overall investment strategy.

What are options?

Options are financial contracts that are sold by one group to another party. An option writer is the person that sells options and the option holder is the individual that buys an option. The option writer and holder usually buys and sells an option at an agreed upon price.

Options typically represent an underlying security. The security could be anything from a stock, mutual fund or bond. A security also includes other types of investment vehicles as well. Securities can also be viewed as an intangible investment.

The main thing to remember about an option is that it represents a specific type of security. So, if a person wants to purchase stock because it is dirt cheap; an option gives them the right to make this purchase at a specified specific price and within a specific period of time. Technically, when a person purchases an option within a specific period of time and at a specific price; this is known as a call option.

What is the best way to use options?

Options are best suited for quick gains in the market. They can be used for a long term approach but they are often used to pump up portfolios with a rather short amount of time. While options are very risky the returns are phenomenal. This is why they make a great short term investing strategy.

How do options work?

When an options seller markets contracts to buyers they do so at a specific price within a specified period of time. After the options buyer purchases the contracts they hold onto the options until they are ready to buy them or sell them back into the market. Option holders usually hold onto their contracts and closely monitor the market. They will then purchase their options if the market conditions are favorable for this type of action. They can also sell them if they think this is the best course of action to take.

Option holders typically buy specific securities at set prices before a given date. Once that date passes an option holder will not be able to purchase or sell a contract at a set price. For example, if an option holder has the right to purchase 200 securities of a particular stock for $2.00 a share; then they must do so before an expiration date arrives. Otherwise the option holder will have to sell or pay for the current stock price for that particular type of stock.

Keep in mind that a person is not obligated to buy or sell an underlying option security at a particular price just because they have purchased the option to do so. The option just gives them the ability to purchase an option at a specific price if the investor thinks this would be a wise thing to do.

Do not forget that the contract prices can also fluctuate. So, there are some instances where people can buy or sell their options at a lower or higher rate than the set price. Investors must make sure that they are completing any options transactions before the expiration date otherwise their options purchase will become void.


Risks Associated with Options

Options trading is very lucrative in terms of investing. This is one reason why they often included within many people’s portfolios. An investor is able to make up to 1,000% (or a higher) using this type of investment strategy. The advantage of options trading lies in the fact that people are able to control an equal number of shares of a particular security but at a lower price. Options allows buyers the ability to purchase securities without having to spend full price for each share.

While this type of investment is fairly stable and lucrative it has its risks. Options are connected to securities and securities are not always sound. So, the fact remains is that options can still be extremely risky and people can lose money investing in them. No investment vehicle is 100% risk free. This is especially true for investment opportunities that yield a high return. Wise investors know that that investments with good returns usually come with incredibly high risks. If a person decides to invest within options they should only do so between 3% – 5% of their portfolio. They should also focus only on one options security at a time.

Speaking of time, make sure that you understand that time is not luxury for options traders. As options get closer to their expiration date, the premium in the option deteriorates. If the expiration date passes, then an investor will not get anything for their money.

Since options lose their value as they grow closer to their expiration date; people should only risk money they are comfortable with losing. The fact is that sooner or later investors will lose money when dealing with options.

People can get the most out of this investment opportunity by trading options with expiration dates that is suited for a particular type of security, buying or selling options at the right amounts and by closely monitoring expiration dates. Ultimately, options are a great investment choice for any person that wants to pump up their portfolios within a short amount of time.

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