Introduction to Options for the Beginner
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/or 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 that options are used.
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 as well as the advantages of options in order to optimize your results.
Throughout this book, the use of call and put options are illustrated through a variety of examples. For simplicity, the focus is on equity options—that is, options associated with individual stocks. With minor variations, the same concepts apply to most other kinds of options, such as those associated with an index such as the Dow or those that represent an industry such as the semiconductor industry.