Fun with Options!
Who knew that having options could be so profitable?
So one of the skills I’ve gained over the past two years has really got me excited about the future. It’s can seem pretty complicated, but I’ll try to demystify things a bit. By the end of this post, you should have a general understanding of why I’m so excited.
I’ve been investing in stock options. They are very powerful investment tools that require much less capital and can result in huge (>100%) gains. Unfortunately, they can be very risky, and require a lot of discipline to be successful. Here’s a run-down of how they work.
An option is basically a contract that gives the buyer the right (but not the obligation) to buy something for a stated period of time. As an illustration, they’re kind of like coupons. If I thought the price of beans were to go up in the near future, I would try to find a coupon for them. I can then go to my local grocery store, use the coupon, and buy a can of beans at a discount. An options contract is essentially that coupon. If the coupon is not used within the agreed-upon timeframe, the contract expires and becomes worthless. Instead of using (or “exercising”) the contract, a very common strategy is to trade the actual option, since it gains and loses value as the stock it was created for goes up and down.
The major advantage as explained before is that options gains are magnified compared to stocks at a fraction of the cost. I can spend $1000 on stock XYZ and it may go up 5% in a week, if you are fortunate. A $1000 option on XYZ on the other hand can go up 25-50% in that same timeframe! That’s $250-$500 instead of $50.
A disadvantage though is obviously the opposite can happen and you could lose that much in a week! Also, because of the nature of options, time is a huge factor and requires a very solid trading plan to succeed. In sum, it’s not for the faint of heart and the overly-greedy reckless investor, because it can ruin you!
However I’ve been training for the past year and have learned a great deal about the matter, investing in general, and surprisingly… myself! For instance, I learned that I’m an impatient person, surprisingly. I always thought of myself as patient, and delayed gratification was considered a virtue by me. However, when it comes to my personal development, and apparently money, I want it NOW!
I also learned I could be pretty greedy and even reckless at times. This is a stark contrast to how I’ve generally defined myself: always caring, always giving to others, and always thinking one step ahead. But deep inside, I’ve found some character flaws that I will continually need to sort out. I knew this process would test me and even bring out the worst of me. It’s funny but also very true that money does not change people; it only makes them more of who they are.
So if all else fails and I don’t make a dime, I have at least identified my areas of improvement, and begun improve myself in the process.
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