Options in Stock Investments?
I first learnt about options in my university in Business School. Options are used for hedging risk for investments traditionally, i.e. people use options to reduce their risk, so they pay others to take on their risks.
Options are very like insurance. Stock owners wants people to insure them in event anything happens to their stock, e.g. stock price plunge, and they are willing to pay “insurance” premium to be protected. This was probably the origins of options.
But today, most of the people use options to speculate and trade. Options can give a trader very high leverage. This means, options can potentially make you returns of 100%, 200% even 1000% in a month or even weeks. The issue is consistency. Buying lottery can give you amazingly returns. You pay a relatively small sum of perhaps, $10 and can potentially get $1million in return. The issue is that you may never ever win the lottery.
Of course, the chance of winning using options is much higher in the stock market. But understand that, typically speaking, in order to win in options, you got to choose the right stock, at the right price, within the right time frame. Again, this is a general view. But unlike stock investment, where we need to choose the right stock and buy at the right price, using options, the need to be correct within a certain time frame is important. The reason is because options has a limited lifespan. After a certain date, the option expires and become worthless.
In this post, I would just like to give a quick insight on options, but having said that, I see that I have to go into more basics of an option and I will do that in the next post.
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