Exchange-traded
options are suitable for private investors because,
unlike over-the-counter options, they are standardized,
and have no counterparty risk.
You can buy Call
options, which give you the right to buy, or Put
options, which give you the right to sell.
For every options
buyer, there is a seller, also known as a writer,
and neither side has the odds in its favour.
Equity options
have a standard contact size of 1,000 shares. To
find the cost of an option contract, multiply the
option price by 1,000.
Use commodities
to diversify your equity portfolio. Options are
a good way to do it because the downside risk is
specified.
Index options trade
for larger amounts than equity options and are more
volatile.
Commodity options
are a good way to diversify your equities portfolio
because they specify the downside risk.
A straddle is an
options strategy where you take two opposing positions
simultaneously. You will expect the underlying stock
to move significantly but you don’t know in
which direction.
Options can be
bad for your wealth if they lead you to gambling.
In valuing equity
options, assess the underlying stocks.
Watch the Put-Call
ratio and, when it is significantly high or low,
trade in anticipation of a reversal.
The City uses the
Black-Scholes model to value options. The model
takes into account intrinsic and time value and
the non- payment of dividends. A limitation is that
it assumes stock prices move randomly.
Covered warrants
are an exchange-traded derivative rather like
options. The product is expensive and cannot be
shorted but it is user-friendly. Traders cannot
lose more money than they put up.
The conventional
warrant may be used to buy new shares in a
company at a specified price and time.
