Options
How do they Work ?
Options are the most versatile trading instrument ever invented. Indeed they were initially conceived in 1973 to minimise risk in the stock market and provide income to leveraged portfolios. Options were introduced in Australia in 1976.
Since options cost less than stock, they provide a high leverage approach to trading that can significantly limit the overall risk of a trade or provide additional income. Option buyers have rights and option sellers have obligations. Option buyers have the right, but not the obligation, to buy (call) or sell (put) the underlying stock at a specified price up until expiry.
There are two kinds of options: calls and puts. Call options give you the right to buy the underlying asset. Put options give you the right to sell the underlying asset.
| Buying a Call |
Bullish on the underlying asset.Profit potential only if market trends up |
| Selling a Put |
Neutral – Bullish on the underlying asset.Profit potential if market trends up or remains sideways |
| Buying a Put |
Bearish on the underlying asset.Profit potential only if market trends down |
|
Selling a Call |
Neutral – Bearish on the underlying asset.Profit potential if market trends down or remains sideways |
How to use Options ?
Options can be used in a variety of ways to profit from a rise or fall in the underlying market. The most basic strategies employ the use of a put or call option as a low capital means of profiting on market movement, regardless whether it is up, down or sideways. Options can also be used as insurance policies in a wide variety of trading scenarios. Options provide the same kind of safety net for share portfolios and nest eggs. They also increase your leverage by enabling you to control the shares of a specific stock without tying up a large amount of capital and being at the peril of a merciless market.
The amazing versatility that an option offers in today's highly volatile markets is welcome relief from the uncertainties of traditional investing practices. Options are used to offer protection from a decline in the market price of a stock or an increase in the market price of a stock. They can enable you to buy a stock at a lower price, sell a stock at a higher price, buy a stock at a discount rate or create additional income. You can also use option strategies to profit from a move in the price of the underlying asset regardless of market direction.
2004 MARKED THE FIRST TIME ANNUAL OPTIONS VOLUME SURPASSED 1 BILLION IN THE U.S ALONE. In fact, the number of Options traded in the U.S was up from 30.5% from the previous year. The ASX has also recorded the highest Options Volume ever in Australia as well. Feel like the boat left without you?
Benefits of Options
When most people think of options they immediately think of risk – and that is good, options are all about risk. Options were originally invented to help portfolio managers find strategies to eliminate risk.
During the past ten years there has been an explosion in the variety of option products and their applications – and the reason is simple -- options provide unparalleled versatility. Stock options allow investors to build strategies tailored to their own needs.
For example, a conservative investor worried about possible market weakness may utilize specific Option strategies to hedge a stock portfolio by purchasing insurance or a more aggressive investor may choose to utilize an Option strategy to take a position in a stock for just a fraction of the cost of buying that security outright. Options are also gaining popularity as the tool for generating profits without having to predict a stock's movement.
|
"Unleash the POWER of Leveraged Derivative Investing" "The best person to take charge of your financial affairs is yourself." |
OPTION STRATEGIES
Courtesy: ASX
|
