Options are financial instruments that allow investors to protect their assets, profit from price fluctuations, and hedge their investments. Trading options on the futures stock market is a unique opportunity for investors to apply effective strategies and diversify their investment portfolio. In this article, we will examine in detail the advantages of trading options, as well as the nuances and intricacies of this investment instrument.
Options provide investors with two important advantages. Firstly, they allow for the protection of assets from adverse price changes, which is particularly useful for investors looking to minimize risks and anticipate potential decreases in asset prices. Secondly, options provide the opportunity to profit from price fluctuations. Investors can use options to earn not only from rising asset prices but also from their decline.
Understanding the different strategies and combinations is an important aspect of trading options. There are various types of options, such as call options and put options, as well as different strategies like straddles, hedging, and locking. Knowledge of these strategies and the ability to adapt to different market conditions will help investors maximize their profits and minimize risks.
Trading options can also be a useful tool for hedging investments. Hedging helps reduce the risks associated with fluctuations in asset prices. Investors can use options to protect their portfolio from potential losses related to adverse changes in asset prices, especially in unstable and uncertain market conditions.
When investors buy options, they pay a premium for the right to buy or sell an asset at a certain price. The higher the market volatility or the duration of the option, the higher the premium will be. The option premium also depends on other factors such as the current asset price, strike price, interest rate, and dividend income. Understanding the dynamics of option premiums will help investors make informed decisions and improve their results in trading options.
In conclusion, trading options is a unique investment instrument that allows investors to protect their assets, profit from price fluctuations, and hedge their investments. Understanding the key advantages, nuances, and intricacies of trading options is important for successful investing. Investors who are willing to study strategies and monitor market conditions can achieve significant results by optimally using options in their investment portfolio.
Why entering stocks through options is more advantageous than simply buying stocks?
Firstly, when choosing a stock to buy, we can only purchase it at the current market price. However, by using a PUT SELL option, we can enter into a deal at the desired purchase price and receive a premium for it. If the stock price falls below the chosen level by the expiration date, we will receive the stock at the strike price. One drawback is that the minimum number of shares to be purchased is 100, as the lot size is 100 shares.
Secondly, once you become the owner of 100 shares or multiples thereof, you can use a CALL SELL option to receive additional premiums exceeding dividend payments. If the price exceeds the strike price by the expiration date, you can sell your shares profitably.
Detailed analysis of companies and selection of a suitable company for an investment portfolio with the determination of the desired price range are important for successful options trading. It is also important to maintain an acceptable level of risk.
After analyzing and selecting stocks, you need to determine the optimal expiration date, choose the premium and strike. Usually, short-term options with 1-2 week expiration are more advantageous, but sometimes long monthly contracts may be preferable. It is also important to choose a favorable strike.
When using PUT SELL options on entry, it is recommended to set the strike below current quotes so that when buying stocks, the price is lower than current prices and the premium remains significant. In the case of selling with CALL SELL, it is advisable to set the strike above the stock purchase strike.
It is necessary to find the perfect combination of strike, premium, and expiration. An interactive table can help you with this. Enter expiration data, strike, premium, commissions, dividends, and current stock price into the table and calculate annual returns under equal conditions. You can also find out how much your proposed strike is cheaper or more expensive than the current stock price.
Use a three-row table to calculate profitable contracts for different strikes, premiums, expirations, and company stocks. Three rows allow you to visually select more advantageous options. Remove less advantageous ones and add new options. This way you will find the best contract.
| Expir-on, weeks | Strike ,$ | Premi-um ,$ | Com-mission ,$/lot | Div-d ,%/year | Price ,$ | Strike to price ,Δ% | Yield ,% per year |
|---|---|---|---|---|---|---|---|
, where
Expir-on
- expiration. You need to enter the number of weeks until the expiration date. (For example 2)
Strike -
strike of the contract. (For example 36.5)
Premi-um - premium for the contract, which you can receive for selling a PUT or SELL option. (For example 31)
Com-mission
- commission that you will pay for the contract. (For example 4)
Div-d - dividends in percentage per year paid by the company. (For example 4.68 or 0 if there are no dividends)
Price- current market price of one share of the company. (For example 39)
Strike to price -
shows how much lower or higher percentage you plan to buy shares relative to the current price. If the result is negative, then you plan to buy or sell at a higher price than the market.
Yield
- yield in percentage per annum under equal conditions. It consists of the yield from premiums on options minus company commissions and dividends.
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