stock options as an opportunity to
leverage investments
The stock market has offered some classic
examples of volatility over the past several years. During the
1990's the market was making some incredible gains. It seemed
that virtually everyone's investments were growing at a
substantial pace. These times of strong growth are often referred to
as bull markets, and the 90's were a text book
example of this phenomenon. During this time many
people became lulled into a false sense of security. They
began to believe that the rapid growth would last indefinitely. They neglected
to balance their portfolios and began to invest
heavily in high risk stocks (i.e. the technology sector).
Unfortunately, the market reached a point where it began to
change drastically and stock prices began to drop. When this happened
many people lost all or a large portion of their
investments.
When the market began to fall, it marked the beginning
of a bear market which lasted for about 2 years. Currently
stock prices have begun to regain some of their former value.
However, after incurring heavy losses, many people are
understandably hesitant to resume their previous patterns of
investing. They are a bit more interested in protecting their
money and minimizing their risks. One potential remedy for
this situation is the use of stock options. Stock options an individual to either buy or sell a
certain number of shares for a specific price. These options
are broken up into two distinct categories: puts and calls.
Puts allow for shares to be purchased and calls allow for
shares to be sold. For example, let's say that someone
purchase an option to purchase (put) 200 shares of Acme
Widgets for $20 a share. Furthermore the option must be used
by a designated date in December. The total price of the puts
were $300. If the share price of Acme rises to $50 by
December than the individual can exercise his option and
purchase the 200 shares for a total of $4,000. He could then
turn around and sell them for a total of $10,000. This creates
a net profit of $5,700. On the other hand if the stock price
never rose above $20 then the individual would be out
$300.
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loan with good or bad credit. Options minimize the investor's risk, while still
providing an opportunity for significant gains. However, this
method is not recommended unless the investor is fairly
confident the options will be exercised. On average the
typical option ends up expiring. Although the loss is
minimized, it is none the less a
loss. | 
