Financial options: another investment alternative
Financial options are just that, an option, a chance... an opportunity. There are minimum criteria to go down the options road, since their market is 3 or 4 times more volatile than the stock spot market. There are two types of financial options: American options and European options. The former can be exercised at any time before expiration, while European options can only be exercised at expiration.
Evidently, American options are the ones that handle the greatest volume and therefore are of interest to investors. Within the financial options there are two alternatives. First is the Call option, which gives a right to buy. Second is the Put option, which gives a right to sell. As its name indicates, buying an option gives the right to buy in the case of a Call and in the case of a Put it gives the right to sell. If at the time of expiration, the option is not exercisable (does not give a profit), the loss will be limited to the value of the premium paid. But profits can go beyond the value paid for the contracts.
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Financial options are used to hedge positions, to sell or buy a stock in the future or to add value to a portfolio. Their liquidity is very important and from this derives the frequency of maturities of the underlying. Moreover, once the option contracts have been bought, they can be sold without exercising the right to buy and earn their value. The important thing is to know which side you want to be on according to the market perspective, that is to say, if it is bearish or bullish and thus take the Call option or the Put option.
If the investor believes that the market is going to go up, he should consider buying Calls and will pay a premium for it. Whereas when buying a Put option, it is because his perception is that of a market or an asset that has a bearish scenario and he also pays a premium for that. And that is how you make a dive into this market, because it is not for all investors. You have to consider that it is for the long term, that you have to tolerate price variations. Since the underlying shares of the contracts can be of all the investor's taste; and the most important thing is to be well advised before entering the market.
In a second installment on this topic, we will talk about the other side of the options... who is selling them.... because if we are buying, it is because on the other side there is someone who is selling them.
