I have recently been reading about a little of the basics of options trading.
Okay, so an option is basically one of the following:
- A contract between a buyer and a seller where the seller promises to sell stock at a particular date, for a particular price, known as the strike price. This is a call option.
- A contract between a buyer and a seller where the seller promises to buy the stock at a particular date, for a particular price, known as the strike price. This is a put option.
Okay, now we have that bit out of the way. So why bother? The real reason could be leverage. You put down some money for the option, at the time you buy, and then when the stock goes up for a call option to a price above the level of the strike price, you can buy stock at a discount. That sounds great doesn't it? Damned right it does. Here's the deal though, can you reliably predict that the price will move in a certain direction? That's pretty tough isn't it? But there is more! Can you also predict the minimum price that a stock will reach, reliably, and repeatably? Then there's the premium that you would pay, as the buyer, can you further predict that the stock price is going to move in the right direction, to a price that is the premium above your stock price, reliably and repeatably? And here lies the problem. I know I wouldn't be comfortable with attempting that great feat. Obviously you can see that the leverage, and big rewards are possible, and with that comes the much higher risk.
The put option is the same, but the market moves in the opposite direction, and you would instead be betting on a bearish market.
You need a strong stomach to participate in that market, for sure. Interesting to see how it all stacks up though, isn't it?
Tuesday, November 6, 2007
Ordinary options - risky or not?
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2 comments:
Have you read anything by Robert Kiyosaki, Martin?
I like what he says about 'risk' in that even the safest investment can be 'risky' in the wrong hands.
It is not the investment that is risky, it is the investor.
If you don't know what you are doing, you can botch anything. That is also why the Kiyosaki's say 'start small' in their books.
That way you can get the same type of experience without betting the farm!
If you have ANYTHING in the deal, you are going to feel it so start small.
BTW, there are ways to tell the likelyhood of the trend - you gotta study and practice though to understand and learn from your mistakes.
Have Fun!
Pam Hoffman
http://seminarlist.blogspot.com
Thanks for the feedback Pam.
I haven't as yet Read anything by him, but Rich Dad, Poor Dad is on my list for a "soon to read".
Do you have experience in investing in the stock market at all? I'd love to hear more from you if you do!
Of course any idiot can muck something up. I can absolutely go along with that. What I'm after is minimising the inherent risks found in the various ways to invest first, by learning, and also finding out what is less risky by definition. Then, I will start with 'play money' and work from there. Might never get anywhere, but the journey should be fun all the same!
Martin.
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