What are the advantages and disadvantages of stock options?
stock options are associated with various advantages and disadvantages. The main advantage of stock options is their ability to alleviate the risk. For example, an investor who owns specific shares can buy options to protect himself from a potential drop in stock prices. Another advantage is that individuals can speculate on stock prices and make considerable profits without owning the shares in question. On the other hand, stock options can increase their losses, especially if they are used in a strictly speculative way and/or if the practitioner uses bad strategies.
In essence, the main advantage of stock options is that they are right, but not an obligation, to buy or sell specific shares before a specific date and at a predetermined price. This means that the option buyer is not contractually obliged to make a specific transaction. This means that he can leave an agreement if he wants it. On the other hand, howeveri.
You want to illustrate, consider an individual who has a stock that is currently at $ 50 (USD). For personal reasons, the shareholder may want to sell shares within one year for the current price of $ 50 and not a cent. To achieve this, he can buy the PUT for a premium of $ 5. If the stock price dropped below $ 35, it may decide to sell shares and obtain $ 50, which effectively limits losses. Conversely, if the stock price increased to $ 75, then it may decide to leave the option and sell shares on the market for a new advantageous price.
The individual can earn money by purchasing the options of shares that he doesn't own when the stock price drops. Suppose one buys the PUT for the same supply as above after the estimate that it will throw itself below 40 USD. If the price subsequently dropped to $ 25,Then the option holder can buy shares at this price and quickly sell it for $ 40, thus spoiling a quick profit of $ 15 minus premium costs.
In addition, additional strategies include using call options. These allow individuals to be advantageous in anticipation of the stock price. For example, after inventory analysis, an individual may conclude that it is caused by an increase in value. Then he can buy a call option that allows him to buy shares for $ 40 in a given time frame. If the stock price should then increase to $ 70, then it may decide to buy it for $ 40, and thus achieve a profit of $ 30 minus the premium for paid.
Unlike professionals, the shares of the optics can emerge by great -ness caused by the lever effect associated with these financial instruments. In principle, the lever effect allows the individual to hold an asset whose value is greater than its initial capital. For example, a 10: 100 lever effect would allow an individual to get an asset exposure worth $ 100 per bondmove $ 10. Therefore, an individual involved in such an investment is exposed to risks and benefits associated with asset. In this case, if the result is favorable, the investor will reap large rewards; Conversely, if investment tanks can rape losses exponentially.
In addition, the strategy of trading in options considered very risky includes what is referred to as naked options. These are calls and put, which are sold without the ownership of the shares in question. For example, a speculator can sell the possibility of a naked call that will be applied at a price of $ 50. If the price subsequently increased to 80 USD, the seller will be obliged to buy buy stocks on the market at this price and sell them to the buyer of the option for $ 50. This would cause a loss of $ 30 minus any bonus taken from the buyer.