Stock Markets Exposed
Options - More exciting than investing in stocks?
Someone told me that options are more exciting than investing in the underlying stocks because they offer more leverage. Can anyone explain this to me?
Public Comments
- "Exciting" and "investing" in the same sentence??? Does not compute.
- If exciting means you stand a greater chance of losing all your money and you don't mind, then...yes options are exciting. Used in the right way, i guess they can really pay off. My favorite option buy is Yahoo. Several month ago, i bought an oct 06, @27.5 option. Up until October, yahoo crept along and settled in around $30. At this point, i was 2.5 points (30 - 27.5) above my stike price and with 10 contracts or 1000 shares, i was about $2000 dollars ahead. Well, on monday of the second week, yahoo drops $ 4, now washing away my 2 grand gain and 2 grand that was my principle. Mistake... I should have sold it when my goal was reached and had plan to sell the previous friday. Oh well......
- Suppose you have $10,000 to invest, and you want to buy IBM. Suppose it's selling at $100 a share. You can buy 100 shares. If IBM goes up to $120, you made a profit of $2,000. But if it goes down to $80, you lost $2,000. Now suppose you use options to invest in IBM. Suppose a call option with a $100 strike price is selling for $10. You can buy options on 1,000 shares with your money. Now if IBM goes up to $120 before your options expire, you can make $20,000. That's leverage. But if IBM goes to $80, or if it stays at $100, your options expire worthless and you lose all your money. That's also leverage.
- If you want excitement go and play roulette. Investing is about managing your money responsibly while safeguarding your capital. Options are for real experts.
- Options offers more than just leverage. They allow you to profit in any market condition. However, you need to setup the trades properly and that's where the complexity arise. Example, if you think a stock is going to drop 20% in 3 months time, you can setup a bear put spread instead of just buying a put option. Although your profit is capped, your risk is lower as well. There are also strategies allowing you to profit from either low or high volatitility. Example, long straddle strategy allow you to profit if the stock makes a strong move upwards or downwards, good strategy to use when playing FDA or lawsuit announcements.
