| In this stock market investing guide I am going to be | | | | third Friday of July and the strike price is $70. The |
| telling you all about options. Today I am going to | | | | total price of the contract is $3,15 x 100 = $315. |
| explain why you should use options and how options | | | | Remember a stock option is a contract to buy 100 |
| work. | | | | shares, that's why you must multiply the contract by |
| There are two main reasons why you would use | | | | 100 to get the total price. The strike price of $70 |
| options they are to speculate and to hedge. | | | | means that the stock must rise above $70 before |
| Speculation - when investors speculate they bet on | | | | the call option is worth anything, also because the |
| the movement of a security. This is where the big | | | | contract is $3,15 per share the break even price is |
| money is made or lost. When you buy an option you | | | | $73,15. |
| to be correct in determining the stock movement as | | | | When the stock price is $67 its less than the $70 |
| well as the magnitude and timing of the movement, | | | | strike price so the option is worthless, don't forget |
| to succeed you must correctly predict if the stock | | | | that you paid $315 for the option so you are down |
| will move up or down as well as how much the price | | | | by this amount. |
| will change and how long it will take for this to | | | | Now let's imagine that the stock price rises to $78. |
| happen. | | | | The options contract has increased along with the |
| Hedging - you can think of this as an insurance policy. | | | | stock price and is now worth $8,25 x 100 = $825. |
| Options can be used to insure your investments | | | | Subtract what you paid for the contract and the |
| against a downturn. If you wanted to buy a stock | | | | profit is ($8,25 - $3,15) x 100 = $510. As you can see |
| and limit any losses you could use options to restrict | | | | you almost doubled your money in just three weeks. |
| your losses and enjoy your profits in a cost effective | | | | At this stage you could sell your options and take |
| way. | | | | your profits. |
| How options work | | | | In the next part of this stock market investing guide |
| Lets say that on May 1 the stock price of xyz | | | | I am going to be telling you about the different |
| company is $67 and the premium (cost) is $3,15 for a | | | | types of options. |
| July 70 call, this indicated that the expiration is the | | | | |