The transition to a New Year is a good place to reflect on the key events of the past year and look ahead to the coming year. Each of us has a handful of main sectors in our lives; Health, Wealth, Social, Personal. Many of us accept the responsibility of these segments of our lives and recognize ways that we can actively drive the dreams of our future. Is there anything wrong with Dreaming? Not if you can identify specific actions that move you toward the accomplishment of the dream.
Having worked in my past years to build a comfortable financial status it’s important that I monitor the funds to prevent heavy losses and maintain regular expansions. Back in the early days of my life I was told that Options (Calls and Puts) in the stock market were risky and should be fully avoided. In taking a closer look at Options I find that they are great tools to use toward my financial dreams. What are their biggest benefits?… Protection, income, flexibility and leverage.
The long put (LP) is the best protective instrument of equity positions. The LPs give me the “right to sell my stock at a selected price over the contract period of time.” I get to choose the price (strike price) and the contract time (expiration period.) What if the company I’m investing in runs into serious issues and drops hard in stock price? As long as my insurance has not expired, I am protected as much as I was when I bought it.
How can I generate income by trading options? I’ve been investing in stocks for decades and have developed a comfort level owning a piece of the companies that bring great products or services to our lives. During my investigation of options’ characteristics I learned about the components that brought value to the tools. By monitoring the stock market I find that I can relate the options characteristics with the opportunities that are being offered to me and generate nice income regularly.
How do Options offer me flexibility in my investment strategy? Having studied the variety of options combination strategies I can see these instruments as added investment tools. Who would have thought that Calls could be profitable in a bearish trend, or Puts profitable in a bullish trend? What a worthy concept to spend some time learning about. I found that my ability to predict the changes in the stock market are not dependable, yet, gaining a basic knowledge of how to apply these tools to remain stable and balanced in any market environment is a wonderful advantage for my investment style.
How do options offer ‘leverage?’ I haven’t looked this word up in a while. Webster says, n. the mechanical advantage gained by using a lever. So, what do they say about ‘lever?’ The definition is lengthy, but describes tools that enable us to lift weights that would be too heavy to lift bare-handed. As an options trader I’ve experienced the nice benefit of this by reducing my capital exposure and expanding my potential return on investment. In general, options are about 10% as heavy as long equities, giving us the chance to carry valuable assets at a fraction of the weight. [Full understanding of the risk is important before investing in leverage instruments.]
My new resolution? I’ll spend a minimum of five hours per week expanding my understanding of Wall Street. May 2013 bring you great rewards for your efforts! (Me, too 😉