What are your financial planning options

Posted on: November 9th, 2012 by

Options are one the most versatile trading instruments ever invented.  Since options cost less than stocks, they provide a high leverage approach to trading that can significantly limit the risk of a trade.  Simply, option buyers have rights and option sellers have obligations to the buyers.  Option buyers have the right to buy or sell the underlying stock at a specified price until the third Friday Financial Planning - Rockville, MDof their expiration month.

There are types of options: calls and puts.  Call options give you the right to buy the underlying asset, whereas put options give you the right to sell the underlying asset.  Before stepping away from  your financial manager, it is important that you get to know the inner workings of both.  Every investment strategy you will have or be given by investment advisers will require your working knowledge of both types of options.

There are no margin requirements if you want to purchase and option because your risk is limited to the price of the option.  In contrast, option sellers receive a credit in their account for selling an option and get to keep this amount if the option expires worthless.  However, option sellers also have an obligation to buy or sell the underlying instrument if their option is exercised by an assigned option holder; therefor selling an option requires a healthy margin.

The price of the option is called the premium.  An option premium is priced on a per share basis and each option on a stock corresponds to 100 shares.  Therefor, if an option premium is priced at 2, that corresponds to 200 shares in the company’s stock.  Yes, this all does sound a bit confusing at first, but if you sit down with a financial adviser and educate yourself with reference material on the subject, you will be better able to make financial decisions on your own.



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