Buy Options
The financial markets are highly developed in today's world and there exists an impressive array of simple and complicated financial products to whet the appetite of any investor. Among the many ways to "play" the stock market, options are one of the top favorites, especially among seasoned investors. While there are several reasons why options are in the trend, one thing stands out - because they are relatively cheap to buy compared to their corresponding stocks.
But do you simply rush to your stock broker and buy any option you see because it is relatively cheap? The smart answer to this is "no" because options are a tool and as with all tools, you need to know how to use it wisely. Take an example, you currently hold stocks in ABC company. You bought stocks in the company because you had reasons to believe the stock price will rise. Yet in the short term, your research shows that the price might fall.
In this case, a seasoned investor might make use of options to hedge. So if the price drops, selling options will net him profits in the short term without sacrificing his long-term profit from his stocks. By utilizing options, he can continue to hold his stocks for future potential profit, and enjoy short-term profit from the price drop as well.
Another reason to buy or sell options is when you have confidence that the price will move significantly in the corresponding direction in the near enough future. You would have bought the stock but you do not have that much money to make a decent profit. Or, you want to take a bigger risk for greater reward for the same amount of capital.
Be cautioned though that options do expire. This is the "catch" as to why options are cheaper than their corresponding shares. While you may hold the shares for as long as you want for price appreciation or dividends, options become worthless after a set time frame.
Options are a risky business. It is highly suggested for the investor to do his due diligence and engage in his own research regarding the best options to buy, what options to buy or sell, where to buy options, and what not. Be careful and good luck!