3 Respectable Strategies for Buying Investment Options

Usually investment options are investment tools used by experienced investors. However, if you can understand the fundamentals behind what drives the value of options, you can become familiar with how they work and what strategies you can employ in order to profit from them. Unlike investing in mutual funds, where many of the securities are low-risk in order to provide the least possible overall risk for your portfolio, investing in options entails some more complex financial concepts. The article below will briefly describe the variables that influence the prices of options and how to use these variables to your advantage. However, before beginning, it is important to understand that options represent the right but not the obligation to purchase a security at a specified price at any time in the future. This specified price is also referred to as the strike or exercise price.

1. Stock and Exercise Prices

The first and most prominent variable in option pricing is the price of the underlying asset. As the stock price approaches, or distances itself, from the exercise price, the option will either gain or lose value. For example, if your option states that you can buy a stock for $10 and the stock is currently trading on the market for $30, your option will be very valuable since it allows for a profit of $20. This is accomplished by buying the stock at $10 (using the option) and then selling it immediately at its market price of $30. As such, a good strategy to employ is to try and judge the perfect timing to exercise your option. Your goal is to use the option when the amount between the market value and option strike price is greatest as this will maximize your profit.

2. Volatility

Volatility is another important aspect to consider when buying or trading stocks. If the stock price seems to be increasing at a steady rate, the option will be more valuable since the probability to achieve a positive return is greater. As a result, you should try and buy options in stocks that are less volatile.

3. Expiration period

Another strategy you can employ when buying investment options is to look for options that provide a longer expiration period. Options with a longer shelf life will be more valuable since there is a higher probability that the stock will eventually rise above the strike price.

Although there can be other factors influencing the value of investment options, these are the three main variables to consider. If you work around these variables and develop strategies to profit from them, you should be well on your way to understanding options and being able to achieve the great returns associated with them.

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