Banjo Smyth

PART 1: Investment Strategies Using Options - An Overview

Why would you want to trade options?

Options are an incredibly useful and versatile investing tool. They can be used by everyday investors or large Fund Managers. The main feature of an option is the incredible leverage that they offer - with a relatively small amount of money options will allow you to control a large portion of shares (very similar to using a home loan to buy a house - you are able to control a $300k house by only putting in a $30k deposit).  Options can also be used to help insure portfolios and manage downside risk.

Are Options Risky?

Options are highly leveraged so therefore there can be greater risks involved if used in the wrong way. Investment Strategies using options are generally slightly more advanced than the typical ‘buy and hold strategy’ that will be recommended by your broker. In saying this Investment Strategies using Options seem to have developed a bad name and it is generally believed that Options should only be used by Professional Investors and traders. This is Simply not the case.

What exactly is an Option?

An option gives the holder the right - but not the obligation - to buy or sell a set number of shares, on or before a set date at a predetermined price (strike price).
When you buy an option it is then up to you to decide if you want to use this right. If you are to use this right then you would purchase or sell the set number of shares that you had agreed on in the contract. This is known as exercising the option. Remember it is the buyer or holder of the option that gets to decide whether or not they want to exercise the option. If they choose not to exercise the option it will expire worthless.

When using Options you have potential to make money no matter which way the share price goes - Up or Down. Before we look at some individual Investment Strategies using options lets try and understand the basics.

There are two main types of Stock Option

Call Option - gives you the option to buy shares

Put Option - gives you the option to sell shares

So if the market is going up you want to buy Call options and if the market is going down you want to buy put options.

The easy way to remember this is you ‘PUT DOWN’ something.

PUT = DOWN and CALL = UP
The slightly confusing part about options is that everybody can BUY and SELL them. This means that you could make money by selling a Put in a rising market.

Don’t worry if this is a bit hard to understand.  As you learn more information Options will become easier and easier to understand.  I promise. The most important thing to grasp is that PUT = DOWN and CALL = UP.

In ‘Investment Strategies Using Options’ PART 2 we will look at the 4 Main possibilities that you have when using Options in conjunction with your Investment Strategies.

- BUY a CALL Option

- BUY a PUT Option

- SELL a CALL Option

- SELL a PUT Option

This entry was posted on Tuesday, August 5th, 2008 at 8:59 pm and is filed under Investment Strategies Using Options, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.