In public perception, the terms “derivatives” (stock options) and “high risks” (stock options) have been equated with one another. This belief is unfounded. Guest Posting this unfortunate situation is made worse by the fact that stock options significantly reduces your risk when it comes to investing. To reduce investors’ risks, exchange-traded options were introduced, click here.
Stock ownership involves a risk
Many people are stockholders in one way or another. In the past you may have bought stock and been aware that there is a risk involved. Enron was once considered a “high flying” company, solid reputable business and an excellent investment. It is very likely you have lost all or most of your investments if you purchased such stocks before early 2000.
The risk that an investor will lose significant sums of capital is constant. Diversification reduces some risks but, in the years 2000-2002, diversified mutual funds holdings did not protect them from stock market declines. Investors in the traditional way can only reduce their risk by selling off their stock investments. To lower the risks of the stock market, stock investors are required to sell some or even all their stock portfolio.
Stop loss orders have been used by some to eliminate positions that lose value. However, they are not a guarantee of an exit. It is common to use fundamental and technical analysis in search of the most promising stocks. But this does not eliminate the possibility for loss. It is dangerous to play the stock market if one does not understand how they can protect themselves from possible losses.
A WAY TO REDUCE RISK IN THE MARKET
Stock options come in two types: call options and put options. A standard “call option” gives the owner the right, on or prior to a predetermined “expiry”, to buy 100 stock shares for the specified strike price.
You can sell short options. A seller who has a call or put option is required to provide the shares, while a seller with a buy option must acquire the stocks. Selling an option contract involves a risk, as you will be obligated to do so. Although the risk associated with such sales is high, it can still be controlled.
A trader or investor in securities who wants to take control of a particular stock can do so by using options. Options can protect stocks from loss and generate income. They also allow you to speculate the market. This is all possible without you taking an undue amount of risk.
BUYING STOCKS INSTEAD IF CALL OPTIONS
If you are convinced that a particular company’s shares will increase and they currently trade at $30.00 each, you can get 100 of them for only $3,000.00. If you decide to trade, your maximum loss is $3,000 but the upside potential for this investment is unlimited.