Many investors stick to bonds or mutual funds, and those can be appropriate investments for many purposes. On the either hand, it can also pay to understand when it might make more sense to look into assets of other kinds.
In particular, a variety of derivatives allow for things to be accomplished that would be more or less impossible for those who stick to the financial instruments they are based upon. Options, for example, provide investors with leverage that even an especially generous margin account will not normally enable.
Unfortunately, many investors feel intimidated by options and other derivatives, a situation that is not helped by the reputation they have for being difficult to master. A video by Markus Heitkoetter online, however, makes it clear that any investor with a bit of confidence and a willingness to learn should have no trouble.
Betting That a Stock Will Move at Least a Certain Amount in a Particular Direction
As most investors already realize, there are two basic types of options. Each has its own purpose and the two can also be combined to achieve particular goals:
- Call options provide their owners with the ability to buy a certain amount of stock at a predetermined, unvarying price, wherever that issue might currently be trading.
- Put options do the same with regard to selling, once again at a set price that does not change after the option has been written.
The Two Factors That Determine the Current Price of an Option Contract
The value of any given option also depends upon two factors, although how much each contributes to its current price can vary in fairly subtle ways. These factors are:
- The strike price relative to the price at which the option is currently trading and the style of the derivative in question.
- The expiration date by which the option must be exercised if the owner wishes to do so at all.
Any option that can currently be exercised to produce a profit should always be worth at least a similar amount of money. An option with some time remaining before its expiration date can be worth a significant amount of money even when it is still on the wrong side of its strike price. This reflects the fact that things can still change in the meantime.