How to Invest in Options
- 1). Study and learn all you can before you decide to invest in options. While it is good to diversify your portfolio, options are a complicated specialty. Options change rapidly and the language concerning options is complex. "Call" options (buying underlying items at strike price until expiration or selling the right to buy underlying items from you at strike prices until expiration) are different from "put" options. In put options, to buy means to have the right to sell underlying items at strike price until expiration; to sell is selling the right to sell underlying items to you until expiration. You must be good at math to analyze the risk and figure potential profit.
- 2). Establish your standards, set limits for yourself, follow your pre-determined plan for investing and never go beyond your limits. Look carefully at your overall living budget. Determine the amount of money you can afford to invest. Ask yourself or a trusted financial advisor what return on your investment you need in order to profit.
- 3). Invest in options by considering the wide range of possibilities. If you are a speculator (liking immediate income) in investing, selling uncovered calls and buying near-expirations options may be just the thing to feed your adventurous spirit. For the conservative investor who values long-term growth, use of options to supplement your portfolio is more the way to go. As with all investments, consider the opportunities to invest in options in terms of what they provide for protection, income and diversification.
- 4). Monitor the stock market regularly. Watch out for open positions concerning action points. Understand the financial advantage of your investments. You want to increase, not stagnate or diminish.
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