Options Investing

http://www.cakefinancial.com You may think options investing isn’t for beginners, but many investors use it to protect their stock investments. So let’s take a look at how it works. An option is a contract. It gives you the right—but not the obligation—to buy or sell an asset at a specific price before a certain date. I know that sounds confusing, so let’s look at an example. Let’s say you own 100 shares of a company called Lemon Car Dealers, which you bought at $100 a share, and is still trading at $100 a share. For some reason, you think the stock might decline in value, and you want to protect yourself. After all, if the company goes out of business, you’d be out 100 shares at $100 each, which is a total of $10,000. So, you buy an options contract for $1,000. This particular contract lets you sell 100 shares of Lemon Car Dealers for $80 a share. Two things could happen. First, as you suspected, Lemon Car Dealers could go out of business. But guess what? You have a contract! You can sell the shares for $80 each. You get $8,000 from the sale, so you only have lost $2,000 of your original investment, plus the $1,000 the options contract cost you. On the other hand, let’s say Lemon Car Dealers does really well, and the stock skyrockets to $200 a share. So, you just let the options contract expire. You’re only out the $1,000 it cost you—which isn’t bad, considering you can now sell your Lemon Car Dealers stock for $20,000. One final note: What I just described is one type of option, called a put option. If you’re interested in trading options, you need to understand the other type as well—the call option. Join Cake Financial Today for FREE! http://www.cakefinancial.com