 Options Trading for the individual investorPublished Date: 2008-07-29 15:43:10 WorkOnInternet.com
Put Option: An option contract giving the buyer the right to sell the underlying security at a specified price within a certain period of time. A put is purchased in expectation of lower prices. If prices are expected to rise, a put may be sold. The seller receives the premium as compensation for accepting the obligation to accept delivery, if the put buyer exercises his right to sell. Continue reading to begin your exploration into the many advantages that these "contracts" offer. Options have been available to trade for nearly 35 years. However, it’s only now that they have come to the forefront. The same options strategies exist now that existed then. Among other uses, options were the same great hedging vehicle then that they are now. They have always helped manage risk and “smooth” profitability. Why has it taken nearly 35 years for options to receive their “due”? Credibility. Options are more complicated than stocks as well as being more powerful. There are many more risks involved in options trading aside from the price direction risk that they can share with stocks. Good “old fashioned” procrastination with regards to education has hindered options growth until very recently. Educated investors now UNDERSTAND options and that’s lead to increased credibility and an explosion in usage. The lack of proper education in the options market can lead to the improper. When an instrument as powerful as an option is misused, large losses can and will ensue. This resulted in the media taking a negative outlook on options (they did not understand them either) and negative publicity followed. There is no substitute for becoming educated and fully informed with regards to options. There’s also never been a better time to become involved in the options markets. With the NASDAQ about to launch yet another options exchange that will trade options based on “penny” spreads and with the SEC allowing options risk to now become “risk based”, the tables have truly turned in favor of the INFORMED individual investor in this market. Why invest in an options education? Quite simply, options are the only investment product that allows an investor to protect and enhance profits in any market environment. What advantages do options give the investors? Well, first off, the markets move up, down and “sideways”. Options strategies can be employed to profit from all type of market environments. PUT options allow an individual to conveniently profit from downside movement in stocks. Additionally, for the less aggressive, options can protect long stock positions when an investor would prefer to retain their holdings but senses potential turbulence along the way. Options are a true hedge. Diversification has been preached as a way to lessen risk and it does. But options, when properly used, can be a pure and powerful hedge in a way that a blunt tool like diversification could never be. Nor could “stop” orders for that matter. Stops do not always have to be activated and often stops merely act as a “shake out” device that prematurely removes an investor from what becomes a profitable trade. However, on large “gap” openings, stops only become activated after the first trade, which is far too late. Options protect until expiration and from a defined price level and are not affected the way stops are on gap openings. Options can afford much more patience and require less precision in timing and price level. The third advantage of options is that an option position is less risky once the total dollar risk between a stock position and an option position is balanced. Realize that this requires payment for a little time premium to own the option, but when executed properly, it is normally pennies compared to what you could lose in a gap of the stock. Think of this strategy as a little insurance policy that protects you against catastrophic losses. The fourth advantage of options is cost effectiveness. Options are available that mimic a specific stock’s movement 90-100% yet costs only a third (or even less) of the actual stock. That translates into higher returns on investment (ROI) and more importantly, more capital in your account to use in other places. Skill is required to select the right option for what you want to accomplish. That skill can be acquired by learning a strategy called Stock Replacement. You must first understand the strategy and then learn the process for selecting the correct option to fit your opportunity. Another advantage of the option is flexibility. Options are infinitely more flexible than stocks and may be employed in many ways. First, options allow you to trade not only an up market and a down market, but also a sideways market by trading volatility or time decay. Although stock traders can trade a down market as mentioned earlier (shorting stock), they cannot trade a sideways or stagnant market. However, there is a way for an option trader to trade in a sideways market. As a matter of fact, there are several ways. This leads us to another flexibility advantage of options: the ability of options to take advantage of a situation in multiple ways. No matter what your capital, your risk tolerance level, or what your style and philosophy, you will find an option strategy that fits you and your identified opportunity. The flexibility of options even extends to what you can do once you are in a position. Options easily allow you to continue a position out into the future (roll) when things remain the same, totally change the position on the fly (morph) when the opportunity you are in changes, and with the understanding and proper use of synthetics, close the position in more than one way. Options are the most flexible trading instrument out there. The last advantage that we’ll mention is that with a stock position you cannot lock in profits and maintain your position at the same time. But with options you can do both. Options have many advantages over simply trading a stock. Profit protection, risk management and flexibility are compelling reasons for investors to investigate them and the many advantages they can offer. If you are looking for a financial opportunity that can impact your future, then you should learn about options! http://options-university.com/iscript.php?3440_a97170_0_110300
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