Okay, so we probably all want to make a fortune doing something. Since we aren’t all fortunate enough to make a killing doing what we love, it’s a good idea to be a well-rounded investor. This means knowing a little bit about all different types of investment vehicles… even if you don’t use them. The types of investments you choose will probably depend on your age, areas of knowledge, and risk level you are willing to take.
I’m naturally a bit of a risk taker, so I am constantly looking for investments that allow me to leverage my money. Options are one way to do this since you can control more shares of stock with the same amount of money, thus magnifying your gains or losses. The two main types of options, are call options, and put options.
Example of a Call Option: Company ABC is trading at $25 per share and you believe the stock is headed up. You could buy shares of the stock or you could buy a call option. Say a call option that gives you the right, but not the obligation, to buy 100 shares of ABC anytime in the next 90 days for $26 per share could be purchased for $100.
If you are right and the stock rises to $30 per share before option expires, you could exercise your option and buy 100 shares at $26 per share and sell them for an immediate profit of $3 per share. $4 gain per share minus $1 for the option.
You could also simply trade the option for a profit without actually buying the shares of stock.
If the stock fell from the original $26 per share to $22 per share, you would simply let the option expire and suffer only a $100 loss (the cost of the option).
A put option works the same way, only you are betting that the share price of a company will fall.
Coming soon… I will follow up this post with one detailing the basics of options trading and how to get started.