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If you’re looking to invest in options, check out these insights from Schaeffer’s Investment Research Review team.
Options have become one of the more popular investment vehicles for the modern investor. That said, there are some important misconceptions when it comes to options. Fortunately, the experts at Schaeffer’s Investment Research Review shed light on these option misunderstandings.
“Options are important investment vehicles for investors,” a spokesperson for Schaeffer’s Investment Research Review says. “That said, before investing in options, you should study how they work. It’s also important to dispel any misconceptions you might have.”
First, options have a reputation for being high risk. Ultimately, the risks associated with options depending on the risks you take. Many investors actually use options as a form of insurance on their investments. Properly leveraged, options can mitigate risks Schaeffer’s Investment Research Review explains.
For example, you can use put options to guarantee your right to sell stocks at a certain price, within a given period. Let’s say you bought $10,000 worth of your favorite tech stock. In this case, we’ll assume your money bought you 10 shares (so, each share cost you $1,000 apiece).
Now let’s assume that the company’s annual report is due out in a few days. You’re expecting good news, so too are many other investors. Still, you’ve heard grumblings that the report might contain bad news, such as missed earnings. You’re confident in the company, but you’ve also got some worries.
In this case, you could buy 10 put options guaranteeing your right to sell 10 shares of the company’s stock at $1,000 within the next week. Thus, if your worries become reality and that tech stock takes a big hit, you’re protected.
While you can use options as a form of insurance, many people use them instead to make highly speculative bets. These moves are typically high risk, high reward. If the investor turns out to be correct, he or she might produce huge profits. However, with options, one wrong move can cost your entire investment.
Options expire. This means if you don’t exercise them within a certain time frame, they become worthless. Stocks, on the other hand, don’t expire, (although they can be wiped out by bankruptcy). Still, if you buy a stock today and it loses half its value over the next year, you can hold onto the stock for years if need be, and someday you might produce a profit.
Investors need to be careful when taking on high risks, but that doesn’t mean investors should avoid all risks. With risks come rewards, and the riskier the investment, the higher the potential profit, generally speaking. It’s often wise to use risk capital, meaning money you can afford to lose, to make higher-risk investments. If you make the right moves, you can drum up huge returns.
“It’s wise to diversify your investment portfolio, and not just by companies and industries, but also risk profiles too,” an expert investor at Schaeffer’s Investment Research Review points out. “If you invest in only low-risk investments, you’re typically going to get small returns. With the right options investments, you can pull in huge profits.”