Trading options sometimes seems cloudy in secrecy, when really it's a straightforward way of investment, employed by big expenditure businesses and by people. Sometimes, the world media takes delight in spreading the fear because a careless employee has made secret and foolish assets using derivatives such as options, and thereby dropped a massive amount of money.
This type of press exposure has resulted in options trading having a bad reputation. The truth is that most responsible sellers utilize options as a means of relieving risk, not increasing it.
How does this work? An investment company, say, may have purchased a large number of shares in a specific business for its buyers.
When the market crashes for some factor or another, this will have an effect on the prices of this business's stocks, even if the company is essentially sound. Most purchasers will attempt to sell the shares as soon as possible, but often cannot find a purchaser to stop the carnage.
However, if the expenditure company buys a 'put' contract on the shares that it owns, this gives it a good guarantee that they will be capable to sell the stocks at a particular fixed cost, even if those shares are investing much lower at the time. In effect, the company is buying a type of short term insurance to ensure that its expenditure is protected to a certain amount. In this way, it protects its customers from heavy losses, and at one time protects its status.
On the other hand, say a major business such as Sony plans on creating a new gadget in the near future. The anticipations can create quite a lot of interest in the stock, and stock rates grow as an outcome.
In this case, an investment company may want to buy up large blocks of stock for its clients, but at the greatest achievable price. So, before the madness starts, the company may buy the right to purchase the stock in the future at a set price (this is called a 'Call Option' contract).
This then is a guaranteed price that it can pass on to their clients. Naturally, if the stock has increased in cost over that time, the customers will benefit from the foresight of the investment business, and will make an immediate profit.
If, on the other hand, the price is lower, the firm will simply allow the choice to expire, and buy the stock at the lower price. Either way, it winds up with the best possible trades for its clients, and of course its status is secured.
This type of press exposure has resulted in options trading having a bad reputation. The truth is that most responsible sellers utilize options as a means of relieving risk, not increasing it.
How does this work? An investment company, say, may have purchased a large number of shares in a specific business for its buyers.
When the market crashes for some factor or another, this will have an effect on the prices of this business's stocks, even if the company is essentially sound. Most purchasers will attempt to sell the shares as soon as possible, but often cannot find a purchaser to stop the carnage.
However, if the expenditure company buys a 'put' contract on the shares that it owns, this gives it a good guarantee that they will be capable to sell the stocks at a particular fixed cost, even if those shares are investing much lower at the time. In effect, the company is buying a type of short term insurance to ensure that its expenditure is protected to a certain amount. In this way, it protects its customers from heavy losses, and at one time protects its status.
On the other hand, say a major business such as Sony plans on creating a new gadget in the near future. The anticipations can create quite a lot of interest in the stock, and stock rates grow as an outcome.
In this case, an investment company may want to buy up large blocks of stock for its clients, but at the greatest achievable price. So, before the madness starts, the company may buy the right to purchase the stock in the future at a set price (this is called a 'Call Option' contract).
This then is a guaranteed price that it can pass on to their clients. Naturally, if the stock has increased in cost over that time, the customers will benefit from the foresight of the investment business, and will make an immediate profit.
If, on the other hand, the price is lower, the firm will simply allow the choice to expire, and buy the stock at the lower price. Either way, it winds up with the best possible trades for its clients, and of course its status is secured.
About the Author:
If you like options and loved this information, please visit my website: iron condor spread.
No comments:
Post a Comment