What is Stock Options?
The stock Options are the contracts which give the right but not the obligation to buy or sell in underlining asset at a predefined price and within a certain date. The stock Options are bounded by some time limits. In other words, the rights and obligation will expire on a certain date.
There are two types of stock options call option and put option.
Call option (buy option)
A stock call option gives the option of buying at a definite price so that the buyer wants the stock to move up. A call option is an agreement that gives a right to the investor but not the obligation to buy a stock commodity or any other instrument at a specific price within a definite time.
Put option (sell option)
It is opposite to buy option. A stock put option gives the option to sell at a definite price which means the buyer wants the stock to move down.
The stock options belong to the wide class of all financial instruments which are known as derivatives, described by Warren Buffett,"financial weapons of mass destruction". However, it is not advisable for young traders and investors to dabble in the complex over-the-counter derivative. However, exchange traded and listed options and index options also have many benefits if one should use it sensibly.
Following are the reasons why one should trade in stock options-
1. Great investment opportunities in the limited capital:
Generally, young investors do not have much capital to invest as they are already burdened with many financial responsibilities like loans, payments and entry-level jobs etc. For such investors, stock options will play an important role while trading. By plucking little money down investor can limits their potential loss and all exposures.
2. Young investors may have time on their side:
Like any other investment, options are risky but young investors are in a situation to take calculated risks, because the time is on their side. As risk-taking ability and capacity diminishes with age when people become older they are loaded with mortgages, spending on children's education, and so on. So for youngsters, it's a good time to take calculated risks.
3. Hedge downside risk:
Downside protection involves the purchasing of options so that one can hedge a long position. Other methods of this include using stop losses or purchasing assets which are negatively correlated to the asset you are willing to hedge. The exciting weak positions and going can help to create downside protection for fund's net asset value if the condition of the market starts falling.
4. One can collect premiums and increase portfolio yield:
As Investors had to suffer a certain level of risk, they have to consider the use of relatively conservative options strategies such as cash-secured puts and covered calls to collect premiums and increase the yield on portfolios.
Thus to trade effectively in the Stock Options one can take the help of Stock Option Tips or Option Trading Tips from experts.