Stock Option Investing

Stock option investing can be the most rewarding or punishing of choices a person can have in a portfolio. Investments such as these give an investor one of two choices: speculate that an investment will go up or down, or hedge against a predicted fall in value. An option is just like a stock or bond and is considered to also be a security. Option trading and investing is a contract with very limited terms, and is not for the faint of heart and neither is it for the beginning investor. It can be quite complicated at times and is best left to the more experienced trader.

Stock option investing means that a person has a right, but not an obligation to buy or sell. Let's imagine a customer who has found the most beautiful motorcycle ever seen. In just six months, the customer will be promoted to the VP of media relations for a well known company, replacing a gentleman who is retiring. The salary will double and at that time, the customer will have the money to buy this incredible machine. So a deal is struck with the owner to buy the motorcycle which costs fifty five thousand dollars. In six months the bike owner agrees to sell the machine for fifty nine thousand dollars, because the option to buy costs four thousand dollars alone.

Two things can happen during a six month period. During an inspection of the bike by a national biking magazine writer, it is discovered that this bike is actually one of only three ever made, and suddenly the bike is now recognized to be worth $120,000. The owner of the bike must still sell it to the customer for fifty nine thousand dollars because of the option to buy that was purchased for four thousand dollars. On the other hand, if it was discovered that the bike has been in a wreck and some of the parts on it weren't original, the value of the bike drops to forty thousand. The customer could pass on the purchase but would lose four thousand dollars. This is a highly simplified example of how stock option investing takes place. "The crown of the wise is their riches: but the foolishness of fools is folly" (Proverbs 14:24).

The money in stock option investing is made in when an investor guesses correctly if a the investment will go up or down by a particular date. Stocks are bought and sold in bundles of one hundred, never less or more. A call is the right to buy a bundle, and a put is the right to sell a bundle of one hundred. There is always an expiration date when dealing with options. The expiration date may span from less than one month up to three years. The agreement to buy or sell a stock is based on what is called the strike price and the further a stock moves beyond the strike price, the more valuable the option becomes. At the same time, when an investment moves lower than the strike price, the more valuable the right to sell becomes. In actuality, money in stock option investing can be made regardless of the direction in which the market moves.

Learning all the intricacies of stock option investing is a long term process. Often called derivatives, option transactions can be very complicated. Large amounts of money can be made and lost in a very short period of time. One expert in this business suggested that a person buy every book available on stock and read them all until understood both backwards and forwards. Because of the great risk factor and also the great reward factor in investing and trading derivatives, the advisable course of action would be to seek some formal training in the business before ever indulging. Courses can be found both online and at local universities and community colleges.

Certainly seeking the sage advice of those professionals who actively trade in derivatives would also be a wise move. Spend time with these people and pick their brains for as much information as possible. This is time well spent for someone serious about making and keeping the money that is to be made in stock option investing. Discover how to recognize a good investment, when to sell and when to buy. Investing is not for the faint of heart, but for those who can withstand seeing some losses every now and then. This goes with the territory. However, there are investments termed as securitized derivatives, which guarantees a return on the money for investments purchased. Other types of derivatives besides stocks are T-bills which are issues by governments, commercial paper, issued by companies and bonds, also issued by governments. Some investors enjoy buying and selling foreign currency. The gains or losses are realized relative to the U.S. dollar.

A person interested in stock option investing can also put money into what are called commodities, which are items such as orange juice, corn, tea, etc. Ever since some new companies began using corn to create fuel, corn has seen an increase in price. Consequently, because corn is fed to beef and now may be in short supply, investors may also realize that beef will now rise in price as well. In this manner, a wise investor will understand other avenues that will yield better returns. A thorough study of the types of investments available will most likely provide the kind of knowledge to enable a person to make very wise investment choices without having to worry about losing a lot of money. The homework will usually pay off whether investing in stock or derivatives.