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Advertiser partners include American Express, U. Bank, and Barclaycard, among others. The highs and lows of stock market investing can be nerve wracking, even for the most experienced investors. Taking risks with your money is always a source of anxiety. One way you can gain access to the market without the risk of actually buying stocks or selling stocks is through options. The strategic use of options can allow you to mitigate risk while maintaining the potential for big profits, at only a fraction of the cost of buying shares of a stock.
An option is the right to buy or sell a security at a certain price within a specified time frame. The best thing about options is that you have the freedom to choose whether or not to exercise them. If you bet wrong, you can just let your options expire. With all this talk about how great options are, it seems like everyone should buy options, right? Well, not so fast. Now, here is a detailed analysis of the two basic types of options: You could alternatively choose to make a profit by re-selling your option on the open market to another investor.
This will often lead to a similar gain. The only way this can happen is if the underlying company went bankrupt and their stock price went to zero. As you can see, options can lead to huge losses , especially when you analyze it from a percentage point of view.
To be fair, the opposite is true for the upside. Lastly, with owning stock, there is nothing ever forcing you to sell. For example, if after six months, the shares of Nike have gone down, you can simply hold onto the stock if you feel like it still has potential.
Thus, as you can see, there are major pros and cons of options, all of which you need to be keenly aware of before stepping into this exciting investing arena. A put option is the exact opposite of a call option. This is the option to sell a security at a specified price within a specified time frame.
Investors often buy put options as a form of protection in case a stock price drops suddenly or the market drops altogether. Put options give you the ability to sell your shares and protect your investment portfolio from sudden market swings.
And if you feel confident that Clorox stock will recover, you could hold onto your stock and simply resell your put option, which will surely have gone up in price given the dive that Clorox stock has taken. Thus, one way to look at it in this example is that the options are an insurance policy which you may or may not end up using.
As a quick side note, you can buy put options even without owning the underlying stock in the same manner as call options. There is no requirement of owning the stock. The exact same risks apply as detailed in the Call Options section above.
Options are a great way to open the door to bigger investment opportunities without risking large amounts of money up front. But remember that trading options is for sophisticated investors only. This warning arises out of the fact that options trading comes with plenty of risk which have been detailed above.
These transactions are about proper timing, and they require intense vigilance. Also, options are just a part of an investing strategy and should not represent an entire portfolio. Have you taken advantage of put or call options? Do you have any interesting success or failure stories? Tell us about your experience with options in the comments below.
Mark Riddix is the founder and president of an independent investment advisory firm that provides personalized investing and asset management consulting.
Mark has written financial columns for Baltimore and Washington, D. How Put Options Work A put option is the exact opposite of a call option. Risks The exact same risks apply as detailed in the Call Options section above. Final Word Options are a great way to open the door to bigger investment opportunities without risking large amounts of money up front. Taxes Standard Deduction vs.More...