at options are a great way to deflect risks, and give you the opportunity to speculate, and others tell will tell you that options are a needless risk in and of themselves. But what exactly are options anyway? If you are curious, and currently have no options trading advisory services to help you, then this article is for you. Below is a beginner’s guide on understanding options, for the starting investor.
So what are options? Basically, they’re contracts that are typically meant for more advanced investors with more money to throw around and a sturdy safety net. They give the holder rights to buy or sell security at a specified price for a set length of time. With certain exceptions, your typical option contract stands equal to 100 normal stock shares. They come in two flavors: call and put options.
Call and Put Options
A call option is when the buyer of the stocks hope the price of the company they’ve bought stocks from will increase in value after a certain period of time. While a put option is when the buyer does so hoping that the value of the company stocks lowers over time. In either case, when the option’s deadline comes and the buyer comes to collect his stock, they only have to pay a certain price (best case scenario: a lower one) than the price the stocks stand at now. So with a call option; if a certain number of stocks stood at $480,000 before the deadline and has increased to $500,000 after the deadline, the buyer still only has to pay $480,000.
As you can surmise, this comes with a gamble, and a hefty one at that. If you end up on the wrong side of this little wager you have with the company in question, then you lose not only the chance to own that stock, you’ve also lost the thousands of dollars you paid to get it. And on top of that, you could be hit with even more costs after that, as well as diminished returns.
While it is true that options are risky, and considered not worth it in the long run, especially if they backfire, they can also be a great way to hedge against other potential losses. If you fear a dramatic fall in stock indices, for example, you can put options on another company to protect your gains.
Options are a high risk, high reward aspect of a high risk, high reward market. And a good way to navigate that is to have someone there to guide you with sound financial advice. And there are none better at that than Trade Genie.
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