Investment Strategies Using Options - What Options Are Available?
October 1st, 2008 |Stock market offers endless possibilities for profitable investing. As everybody knows after the recent financial crisis, investing in stock market is associated with high risk. Stock market indices can go up or down, taking cues from changes in financial sector, political equations, and economic policies. Stock prices can also be affected by unpredictable events such as natural calamities and terrorist attacks. But there are mechanisms in stock market repertoire that allow a smart and knowledgeable trader to make profits even when the stock prices are falling. Exercising what is known as “options” is one such strategy.
By availing an option, a stock trader gets the right to buy or sell a specific number of a particular share during a predetermined period. The tool of options, as the name indicates, provides a number of options of buying and selling for the trader without actually churning out money. The trader need not pay the whole amount for buying a bulk quantity of a particular share. Only a small portion of the amount needs to be paid in advance. All accounts need to be settled only on or before a specified date. By that time, one can either trade the shares to close the accounts or keep the shares if one has sufficient funds.
There are two basic types of options: call and put. For successfully using these options, one needs to have a fair idea of how the stock market is going to react in the immediate future. Call option is used when the market is in a bullish trend, that is, when the stock prices are likely to increase. You can specify a certain price for a particular share, which will be naturally higher than its current price. If the price of that particular share reaches or exceed the specified price, you will get profit as well as a margin for the successful call. But if the stock price does not go up or goes down, you must have sufficient resources to hold the stocks at the price at the time of writing the call.
Put option is used when the stock price is likely to go down. You can specify a price for a particular share that is below the current price of the share. So even if the share price goes below the specified price, you will get a compensation of one dollar for the fall of each point down the specified value.
Experienced traders use several combinations of call and put options simultaneously to gain more leverage from a volatile stock market. While put is written to ensure the damage control, call option is exercised to get profits. Several strategies like collar, short and long straddles, triple options such as strap and strip, and various kinds of spread are used to make the maximum out of the stock market investment.
Veronica Valentine is an accomplished niche website developer and author. To learn more about investment strategies, please visit Strategies of Investing for current articles and discussions.
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