Options are financial instruments that were invested with the main aim of hedging the risk. With the digitalization of the stock markets, people started using options for booking profits as well. There are many attributes to the options. To begin with, there are two types of options available for the traders. The first type is the call option, and the second one is the put option. A call option gives you the right to buy a particular commodity or security at a specific price (Strike Price). The Put option gives you the right to sell a particular commodity at a pre-determined price.
Let us see how these options hedge the risk for the trader. For example, you are holding 10000 stocks of apple, and it is presently trading at $130. The trader needs to sell those stocks after 15 days, but there is speculation that the stock prices may start falling. In such a case, the trader will enter into a put contract with the strike price of $130 and the following week’s expiry date. Now, even if the stock price falls to the level of $100, the trader will get $ 1,300,000 by selling those stocks. Without entering the Put contract, the trader would have lost $ 300,000.
We have looked at the options’ positive side, but what if the market climbs up and the stock starts trading at $135? In such a case, the trader would still be a profit, and he will still be able to make a profit, and he will be able to sell his lot for $1,350,000. This situation is called Out of Money Trade.
By reading through the above example, you would have understood the benefits of the options. The fact is that the options can also be used for strategizing your investments. There are many options strategies that you can make. For example, you can create a Bull Call Spread, Bear Put Spread, Long Straddle, Long Strangle, Butterfly Spread, and many options.
There is a book called Options as a Strategic Investments. The book tells you about the critical option strategies that can help you maximize the gains and minimize the losses from your investments. The options can help you strategize your investment, and the book leaves no stone unturned to teach you about strategizing your investments. The book doesn’t share any misinformation, and it offers you an in-depth study of the assets. The book also teaches you about the criteria for implementing those strategies.
You can also learn about the option deltas, and they can help you in adopting the right strategies by predicting the direction of the market. You can also use the option pricing models to understand the correct price of the options. You can also use various online portals to learn about the options. Before we conclude, we would like to mention that you should understand the options before using them with real money. You can make huge losses while dealing with options.