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Stock Option InvestingThere are more exciting opportunities available in stock option investing than there are in stocks. The interesting fact about these stock options is that you can yield a profit whether the stock goes up, remains still or goes down. What are stock options and what differentiates them from stocks? Here is some information on stock option investing and how it works.Options give the owner the right to sell (put option) a stock or to buy (call option) a stock. The issuer (writer) does not have the option of choosing. He has to comply with what the holder of the option wishes to do. The price (strike price or exchange price) at which the stock can be bought or sold are spelled out in the options contract. The last date for purchasing or selling the stock is also specified here. Stock options have certain aspects that we shall discuss. Firstly the price of options fluctuates more than that of stock itself. For example let us consider a company called Kruger Inc. let us consider how the value of a stock option changes with either the increase or decrease in the price of Kruger Inc. stock. If the price of the stock is $100 and your stock option is worth $110 then your stock option isn't really worth anything. There is no point in buying the stock from the issuer at $110 when you can buy it at $100 in the market. If this state of affairs continues till the expiry date then you will not make anything. If, however, the price of the stock increases things become interesting for you. There is always a chance of this happening. Let us see what happens when the price of Kruger Inc. stock goes up to $120. The price has changed by $20 so what does this do to the value of your option? You have the right, by contract, to buy the stock for $110 immediately and then releasing it in the market at the current price making a profit of $10 instantly. Therefore while the price of the stock changed from $100 to $120, thus reflecting a 20% change your option value went from nothing to $10. That is a huge percentage increase. Stock option investing is a risky business. Stock options are riskier than stocks. The risk that a stock will become worthless is less remote than the risk of a stock option becoming worthless. You run the risk of the option expiring before market conditions will allow you to make a profit. Therefore it is important for you as an investor to decide how much of your portfolio will go into stock options. A general rule is that 10% is the maximum. The problem with stock option investing is that options expire. Stocks do not. Most options have a life of six months after which they expire. This fact makes stock options useful for short-term plans. The prices have a particular way of moving with the market. If the stock price increases the option price follows faithfully. When the price of the stock is below call or strike the options price barely moves lower at all. But as mentioned before they have huge percentages of gains and are useful in the short term. stock_option_investing |