Options and similar instruments such as warrants are risky but can play a useful part in a portfolio, whether you're using them to hedge, or to gear up your investment. Because so few investors seem to use them, I thought I'd put up the basics - and this article is very, very basic; if you already know about options, you can stop reading now. With an options contract, you can - in effect - control a significant amount of stock with a relatively limited initial outlay at least when compared to the cost involved with buying the stock outright.
Essentially an option is just what the name suggests - it is an option to buy or sell shares at a particular price, as if you said to a friend 'If you ever want to sell that car of yours, I'll give you five hundred quid for it. Yes, that's a childish example. But it's quite an important distinction between options and some other derivatives, such as futures, that you have the choice, and can let the option lapse. With futures, you don't have the choice - you have to exercise them.
Traded options give you a third choice - as well as exercising the option buying the shares , or letting it expire, you can trade it on the market. You can have a call or put option - a call gives you the right to buy the shares at a given price, a put gives you the right to sell them at that particular price. In fact, very few traded options are ever exercised - that's not what they're there for. Be warned that a lot of regular online stockbrokers don't offer options trading, so you may need to find a specialised broker.
We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Shares can go down as well as up.
Tesco PLC Tesco is a retail company. The Company is engaged in the business of Retailing and associated activities Retail and Retail banking and insurance services. Finest and Everyday Value are the two food brands in the United Kingdom. The Company offers a range of personal banking products, principally mortgages, credit cards, personal loans and savings.
This guide to options trading has really covered the entire portion that we need to learn the basics and get ready to start trade. An option is generally an agreement which gives traders a choice to buy or sell an underlying asset at a precise price for a certain date or time. All investors must have a portfolio part save for option trades. It provides good opportunity to earn large profits with a small investment. Right option strategies will help you to improve chance of winning and limit the downside risk.
Great intro Anna, I'm currently buying put options on US companies to bet the share price will fall, and it is currently working, roll on the bear I say. Are you planning on writing any further articles, to maybe cover things like writing covered calls for income, what a straddle and strangle is and how and when to use them etc? Might also be worth listing brokers you can access from the UK who allow you to trade options, as IG index have some, but is limited to be honest, and they only have shorter term dates, no LEAP's etc.
I use Interactive Brokers, who are basically a "transmission" mechanism into lots of different markets that allows you access to worlwide options etc, which is what you will need if you are going to trade seriously, and they allow DMA rather than a retail broker system etc. Other areas might include the difference between European and US style options, contract sizes vs etc volatility in the pricing, and a few worked examples to show how it all slots together.
Keen student of all things financial - always looking for fresh ideas in the markets, whether it be new stocks or innovative instruments.
Thursday, Dec 10 by Anna Morrell. Unlock this article instantly by logging into your account Login or Register for Free Access. Do you like this Post? Share this post with friends. Is Tesco fundamentally strong or weak? You can track all StockoChat comments via Twitter. Anna Morrell Keen student of all things financial - always looking for fresh ideas in the markets, whether it be new stocks or innovative instruments.
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