As everyone knows, most investors continue to use stocks (as opposed to options) for their primary investment tool. Although options volume continues to grow each year, there are still a lot of people who do not understand what all the fuss is about. Well hopefully, I can give you a quick rundown of the reasons investors should be versed in both stock and options strategies. By “versed,” I mean educated in how options work and the potential benefits (and risks) they provide when used correctly. I do not mean, “just try and figure it out by making real trades without knowing what you are doing.”
In order to move along, I will skip the super-basics: What is a call? What is a put? What is expiration? etc. If you need to brush up on these mechanics go to The Options Industry Council. Here the option novice will find the information needed to understand this blog.
How Options Compare to Stocks:
1. The potential for increased return on investment by risking less capital.
Prices in examples given are as of Monday, June 14.
If you expect a stock to move within a defined time frame, you can buy in-the-money (ITM) options that would express this view but require less capital than buying the stock on margin. For example, if you think that Citigroup (NYSE:C) is going to be trading as high as $5 by the middle of September, you have two choices: (more…)
The markets are looking fairly strong this morning after data showed consumer spending of personal income was basically flat compared to the prior month. This, in addition to a slower savings rate among Americans and a flattish reading on inflation, seems to be having a soothing effect on the market.
