Options Are a Perfect Way to Leverage Risk & Generate Income
The economic news out of Europe, China, Japan, has not been encouraging. This, coupled with fears of an overvalued stock market and potential Federal Reserve rate hike, is weighing on investor sentiment.
As a result, the current market risk is high for a stock market correction. That being said, investors seeking income can leverage the risk by using “options.” While the majority of portfolios are made up of stocks, options—either call options (betting the underlying stock price will rise) or put options (betting on the stock’s downside)—have become a popular investing strategy.
But options are not for the inexperienced investor. It takes discipline and a comprehensive understanding of the markets. As long as investors are aware of the risks associated with options, they can provide a solid hedge for profits.
A covered call allows investors to collect cash up front in return for giving up potential gains on the underlying stock. With a covered call, you are selling someone else the option to buy a stock you currently own, at a set price and for a specific period of time.
Worst-case scenario, the stock climbs above the set price and the buyers of the option “calls” (buys) the stock from you. Best-case scenario, the call option doesn’t get used. You still get to keep your stock and collect the money for “writing” (selling) the option that wasn’t exercised.
Covered calls can allow an investor to generate a steady income stream from a portfolio and still benefit from capital gains. It can be effective in the current economic environment where the markets, while near record levels, are volatile. Covered calls can also be effective if the markets are trading in a tight range.
What’s also great about stock options is that investors can control a stock for a fraction of the price without actually owning it. One option contract translates into the right to buy 100 shares of the stock at a much lower cost.
A protective put is a little like an insurance policy in that it helps lock in profits on a stock should the markets experience a correction. A protective put is also a great investing strategy if you think the underlying sector could reverse. Those who love Internet, natural resource, or biotech stocks understand that this is not a rare occurrence.
If you think a stock you own is going to go down, you can get a protective put option on your own stock. If the stock goes down (within the specific time frame), the protective put goes up. You can hold onto the stock and sell the protective put option at a profit. The profit on the protective put will help offset the, hopefully, temporary decline in the price of the stock.
Protective puts work when the markets appear weak or if a stock makes major gains in a short period of time. After all, a stock can swing downward on profit taking just as quickly as it can upward.
Learn-To-Trade.com, Toronto’s Stock Options Experts
When it comes to stocks, there’s more to consider than just “buy low, sell high.” Being aware of different investing strategies, including options, can help investors take advantage of the stock market no matter what direction it’s going.
As the leading and oldest provider of stock market trading courses in Canada, Learn-To-Trade.com
is led by licensed, industry professionals who can help you confidently manage your portfolio and make consistently profitable returns.
Learn-To-Trade.com’s stock market trading course will teach you how to read stock charts, about fundamental and technical analysis, teach you about risk management, and capital preservation. You will also learn about a number of investing strategies, including stock options, stock index trading, futures trading, commodities trading, and FOREX trading.
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To learn more about Learn-To-Trade.com’s stock market trading course, contact us at 416-510-5560 or by e-mail at email@example.com