Options are a type of investment that provides you the right to purchase or sell an underlying security at a certain price for a specified amount of time.
In other words, options provide you with the right to guess on the direction of a stock, but you are limited to that guess for a certain period, usually from one month to as long as three years depending on the option selected. Let's go thru a couple of examples with different scenarios to ensure that you can see how options can lead to magnified returns with low risk.
Say you believe that the demand for gas within the refinery market will send Valero's stock higher. Earnings for the stock come out in June, and you're guessing the market is going to be extremely surprised at how the business exceeded their earnings estimate for that quarter.
In this case, you'd look to purchase "call options" on Valero. Call options are a guess that the underlying stock price will go up. Put options, on the other hand, are guesses that the underlying security's price will go down.
A good move would be to give yourself a little time to make sure that you're right about the trade, but not too much time that it is actually cost-prohibitive on your behalf to make the trade. Options are known as "wasting assets" because they lose value the longer you hold onto them.
Also, the longer the time before the option expires, the more premium you are going to pay. Premium is the price you pay for the option. An expensive option has a high premium; a cheap one has a low premium. Option premiums are dependent upon the market, just like stocks. And options are bought and sold on an exchange, just like stocks.
Options can be used for a variety of strategies but, best of all, options allow you to control blocks of stock very cheaply while confining your risk to the value of the option itself. Options utilized this way with good directional methods and systems can yield huge profits when used appropriately.
Options aren't the only way to yield huge profits, as going public with a company will produce the very same result. If you own a company, but don't know how to go public you can certainly find a company going public on the web.
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