The best reasons for investing in listed options
When it comes to investments, many different strategies and products can be used to make a profit. Some people invest in stocks, others in bonds, and others in mutual funds or other types of securities. However, one investment product that is often overlooked is listed options. Listed options offer investors many advantages that other investment products cannot match.
Some of the best reasons for investing in listed options include:
One of the most significant advantages of investing in listed options is their leverage. When you buy an option, you are only required to pay a fraction of the underlying asset’s price, allowing you to control a much more prominent position than if you were to buy the asset outright.
For example, let’s say you wanted to purchase 100 shares of ABC Corporation stock. ABC is currently trading at $50 per share, so your total investment would be $5,000 (100 x $50). Now, let’s say you only have $2,500 to invest. However, you could purchase two put options on ABC stock with a strike price of $45. Each option contract represents 100 shares of ABC stock, so your total investment would be $500 (2 x $250).
While your initial investment is only one-tenth of what it would be if you bought the stock outright, you still have the same downside protection. If the stock price falls below $45 per share, you can exercise your option and sell the shares for a profit.
Investing in listed options also comes with limited risk, and you can mostly lose the premium you paid for the option when you buy an option. It contrasts with other investment products such as stocks or futures contracts, where your losses could be unlimited.
For example, let’s say you buy a Put option on ABC stock with a strike price of $45, and the premium is $2.50. If the stock price falls to $40 per share, you can exercise your option and sell the shares for a profit of $5 per share ($2.50 + $2.50). However, if the stock price increases to $55 per share, the most you can lose is the premium you paid for the option ($2.50).
Profit in any market conditions
Another great reason to invest in listed options is that they can be profitable in any market conditions – whether the market is going up, down, or sideways.
For example, if you are bullish on a particular stock, you can buy a call option. If the stock price increases, you will make a profit. If the stock price decreases, you can let the option expire worthlessly and only lose the premium you paid for the option.
If you are bearish on a particular stock, you can buy a put option. If the stock price decreases, you will make a profit. If the stock price increases, you can let the option expire worthlessly and only lose the premium you paid for the option.
Hedge against a portfolio decline
Investing in listed options can also help hedge against a decline in your overall portfolio value. For example, let’s say you own a portfolio of stocks worth $100,000. You are concerned that the market may correct shortly, and you want to protect your portfolio value.
One way to do this is to buy and put options on the stocks in your portfolio. If the market does indeed decline, the value of your options will increase and offset some of the losses in your stock portfolio.
Generate additional income
Investing in listed options can also be a great way to generate additional income. For example, let’s say you own 100 shares of ABC Corporation stock, currently trading at $50 per share. You are bullish on the stock, but you would also like to generate additional income from your investment.
One way to do this is to sell call options against your stock. If the stock price increases, the option will be exercised, and you will be required to sell your shares for a profit. If the stock price decreases, the option will expire worthlessly, and you will get to keep both your shares of ABC stock and the premium you received for selling the option.
For more information on listed options, you can visit https://www.home.saxo/en-sg/products/listed-options.