Options

Updated: Sep 11, 2020

Speculative Trading or Investing

Investopedia describes options as financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they choose not to.

  • Call Options allow the holder to buy the asset at a stated price within a specific timeframe.

  • Put Options allow the holder to sell the asset at a stated price within a specific timeframe. Each option contract will have a specific expiration date by which the holder must exercise their option. The stated price on an option is known as the strike price.

Key Takeaways

  • Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date.

  • Call options and put options form the basis for a wide range of option strategies designed for hedging, income, or speculation.

  • Although there are many opportunities to profit with options, investors should carefully weigh the risks.

Optionality and the time value of money.


Let's begin with the most conservative. This strategy is even approved for most Retirement

Accounts.


Lets say you own a stock with a nice dividend of 2% a great yield considering the 10 Treasury at this writing is 0.673%. If you want to increase your income but not your risk you

could go out 90 days and sell a Call option, receive a nice premium for agreeing to sell that stock if it reaches that level before expiration. If the stock is below the strike price at expiration the option becomes worthless and you could consider repeating the process and creating an enhanced compounding effect on your stock holding.


“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”


-Albert Einstein-


Interested in buying a stock? Consider this idea.

Storm clouds could be making you uncomfortable buying a company stock

at current market levels. Consider selling a Put option below the market.


I've always liked this because it's a way to get a company without the mistake of chasing price. Use a little patience and collect a time premium for being that willing buyer at that price below the market.


Going Hypersonic or Life in the fast lane.


Other Ideas include using options as a proxy for stock purchases. If an investor expects a short term move up or down they might purchase put or call options to take advantage of the short term fluctuation in the market values. If we look at recent Google Search Trends we see there has been a lot of interest in this fast moving strategy.




Options have a finite life. Often they expire worthless evaporating into hot air


The Chicago Board of Options Exchange has a workbook for learning purposes, I've attached a pdf for your convenience. The Option Clearing Corporation is also an excellent source of information.

CBOE WORKBOOK
.pdf
Download PDF • 1.22MB

If you have questions on how some of these or other investment ideas my benefit your specific personal needs reach out now.






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