Introduction to Options for the Beginner and Beyond
Why should someone who invests or speculates in the market learn to use options? The simple answer is that options can greatly enhance your profit from stocks and provide the means to protect your portfolio. The goal of this chapter is to familiarize the beginner with call and put options, and demonstrate some of the basic ways to use options.
Suppose you buy a stock for $30 a share and it goes to $33. The stock price has risen by 10 percent and accordingly you have a 10 percent profit. That’s nice! If instead of buying the stock, you buy an appropriate option, you might make a 100 percent profit or even more for the same 10 percent rise in the stock price. That’s better than nice. That’s fantastic!
Of course, there are risks associated with options, just as there are risks with any investment. You need to understand the risks and the advantages of options to optimize your results.
Throughout this book, the use of call and put options are illustrated through a variety of examples. The examples concern options associated with either individual stocks or Exchange Traded Funds (ETFs). An ETF trades like an individual stock but represents a group of stocks that might be identified with an index such as the Dow 30 or might be identified with a financial industry such as semiconductors.