Isn’t it nice having options?
If you’re hungry, you have a wide variety of restaurants to choose from. If you want to buy a car, you have different makers producing different models with an endless array of upgrades.
It’s true that too many choices can sometimes cause paralysis by analysis, but having different options at our disposal allows us to weigh pros and cons and make informed decisions.
Traders have options too, and not just in the variety of different stocks and sectors to choose from.
Stock options allow traders the right to purchase a specific security at specific price at a specific point in the future – but not under any obligation.
Do you think a particular stock will be much higher in three months? Well, you can buy an option for that.
At the same time, another trader might look at the same security and see a drawdown brewing – and there’s an option you can buy for that scenario too.
Options give traders the opportunity to use leverage on their personal stock prognostications, but it’s important to understand how these types of derivatives work before putting them into practice.