STOCK OPTIONS ARE NOT RISKY!

Written by Christopher L. Smith, B.B.A., J.D.


Continued from page 1

USING PUT OPTIONS TO PROTECT YOUR STOCK HOLDINGS

I own a house. Every year I purchase an insurance policy to protect against unexpected damage or total loss ofrepparttar house. My expectation and hope is that I will never have need forrepparttar 112287 benefits afforded underrepparttar 112288 policy, but I payrepparttar 112289 premiums nonetheless.

Just as you would insure your house by buying an insurance policy, you can buy a put option to insure your stock positions against unexpected loss. When you buy a put option, you haverepparttar 112290 right to sell your stock at a defined price for a defined period of time. If your stock holdings fall in value, a put option will permit you to sell those depressed holdings atrepparttar 112291 pre-defined strike price.

Considerrepparttar 112292 example of a stock purchase we used above. Let us assume that you boughtrepparttar 112293 call option and you decided to take ownership ofrepparttar 112294 stock because you believed that it would continue to appreciate. You already have an $8 profit, and you want to protect it against loss so you buy a $40 strike price put option for a cost of $1.50 per share. Ifrepparttar 112295 stock continues to rise in value, you will have no need for your put option and it will simply expire worthless, just as your home owner’s insurance expires atrepparttar 112296 end ofrepparttar 112297 policy term. If something unexpected occurs inrepparttar 112298 market, causing your stock to drop in value, your position is protected against loss because you will be able to sell your stock atrepparttar 112299 pre-defined strike price of $40 per share.

PROFITING WITH PUT OPTIONS

When a trader expects a stock to decline in value, she might sellrepparttar 112300 stock short. Selling stock short requires a significant amount of capital and exposes you to significant risk ifrepparttar 112301 market rallies to new highs.

Put options can also be used to profit from anticipated market declines. You can buy a put option in expectation ofrepparttar 112302 market losing value. By buying a put option, you are only required to payrepparttar 112303 cost ofrepparttar 112304 option. There is no margin requirement. Your risk is limited torepparttar 112305 amount you paid forrepparttar 112306 put.

Assume your stock dropped from $40 to $30, and you had paid $1.50 per share for a put option with a $40 strike price. Your maximum risk onrepparttar 112307 trade would berepparttar 112308 $1.50 you paid forrepparttar 112309 put option. That put option would now be worth at least $10, since you haverepparttar 112310 right to sell a $30 stock for $40 per share. Your profit would be a minimum of $8.50, which represents a 560% profit.

Conversely, assumerepparttar 112311 stock gapped up atrepparttar 112312 market open to $45 per share. Your risk onrepparttar 112313 put option is limited torepparttar 112314 $1.50 per share that you paid, whilerepparttar 112315 short-stock trader has incurred a $5.00 per share loss.

PROFITING NO MATTER WHICH WAY A STOCK MOVES

Perhaps you do not know whether a stock will move up or down, but you do believe it is likely to make a significant move in one direction or another. A stock trader is at a loss, because she does not know whether to buy stock or sell it short. As an option trader, it is possible to profit by using an option strategy such as a straddle.

A straddle involvesrepparttar 112316 simultaneous purchase of both a call and a put option. Assume your stock is trading at $30 per share and you expect that it will make a large move, but you are not sure whether it will be an upward or downward move. You decide to buy a call and a put for a combined price of $3.50 per share. Ifrepparttar 112317 stock makes a large move torepparttar 112318 upside, your call will gain value and your put will lose value. Ifrepparttar 112319 stock moves torepparttar 112320 downside, your put will gain value but your call will lose value. Because maximum loss is limited on bothrepparttar 112321 call andrepparttar 112322 put, there is a finite value by which either can decline while providing unlimited profitability onrepparttar 112323 other side.

Ifrepparttar 112324 stock makes a large upside move to $45, your call will be worth a minimum of $15 per share. You paid $3.50 forrepparttar 112325 combined put and call, so your minimum profit would be $11.50 or a return of approximately 329%. Inrepparttar 112326 event of a large downside move to $20 per share,repparttar 112327 put would have a minimum value of $10which would produce a minimum profit of $6.50 per share or a return of 186%. These returns are possible while risking no more onrepparttar 112328 trade than that combined amount paid forrepparttar 112329 call and put option.

MORE LIMITED RISK OPPORTUNITIES

This article is by no means intended to be a comprehensive exploration of options or option strategies. What this article attempts to demonstrate is that options can be used without significant financial risk. In fact, options are effective tools for limiting your risk inrepparttar 112330 market and, if properly used, are much less risky that stock investing.

Forrepparttar 112331 stock investor, options provide an opportunity to protect positions against loss and enhance returns. Speculators can participate inrepparttar 112332 market without exposing themselves to large risks. Anyone actively investing inrepparttar 112333 market or who is considering such investments would do well to educate themselves aboutrepparttar 112334 benefits offered by options.

Christopher L. Smith, B.B.A., J.D., is a graduate of the University Of San Diego School of Business and Santa Clara University School of Law. He is a practicing lawyer, an active trader, newsletter publisher, and is the founder of TheOptionClub.com. For more information about options and option trading, you may contact Mr. Smith through http://www.theoptionclub.com.


Justify Social Security ... Don't Save for Retirement

Written by Kemberly Wardlaw


Continued from page 1

An opinion adopted by many is to consider social security in partrepparttar closer you are to retirement. For example, if you are sixty years of age and plan on full retirement in five years, you should consider an analysis based on your current projected benefits. Even withrepparttar 112286 proposed reform plans, preservation of benefits is a priority for eligible citizens age 50-55 and older.

If however you are thirty, it may be better for you to omit such projections. The result will be overfunded personal savings. Thus social security will be an added benefit and notrepparttar 112287 benefit.

Considerrepparttar 112288 troubling issues ofrepparttar 112289 2004 OASDI Trustees Report: future scheduled benefits for today's young workers could be reduced by 27% or more if amendments torepparttar 112290 current plan are not adopted.

Young workers should take note of this report. Do not rely on social security and concentrate on personal savings.

In conclusion, you have a risky option—there is only one way to justify social security, don't save for retirement. If this is your chosen route, be prepared for difficult times ahead.

Wardlaw's belief is that familiar life elements best illustrate practical investment strategies; not typical investment jargon. With that philosophy, the author assists financial planners/advisors, brokerage firms, periodicals, and other investment information syndicates create informative and entertaining articles. For comments and questions, please contact the author at tools2invest@yahoo.com


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