Basics of Options.

What are Options?

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. You have used options whether you know it or not. Learn more at www.allmarketpicks.webs.com

You have used Options Before

For example, lets say you buy a coupon to get a laptop for five hundred dollars. Laptops are selling for 510 dollars right now but the coupon cost you ten dollars. The coupon expires in two months. Here are two possible scenarios.

Scenario #1

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All of a sudden the price of microchips skyrockets and the laptop that was worth 510 is now worth 1000 dollars. But you have the coupon. If the coupon hasn’t expired, the store is bound by law (a coupon is actually a contract) to sell you the laptop at 510 dollars. But if you don’t have money for the laptop or just don’t want it you could actually sell the coupon and make a profit. The coupon that you bought for ten dollars you can now sell for two-hundred dollars.

Scenario #2

In this scenario things don’t go in your favor to much. You purchased the coupon but they find out a cheaper way to make laptops and the price of the laptop you bought the coupon for declines from 500 dollars to 300 dollars. You can now sell the coupon for six dollars (that you bought for ten) or hold it and hope it increases in price. For arguments sake lets say you hold the coupon hoping for a reversal in price. Sadly it doesn’t happen and the options expires. It is now worth zero dollars. A 100% loss.

Conclusion

Options can be very profitable but can have devastating losses if you don’t have good risk management techniques. But think about options this way. In scenario #2 you lost money, right? But you purchased that as an insurance because if you wouldn’t have you might not have made that 400% gain you made in the first scenario. Think about it like when you buy car insurance. If you didn’t have an accident this year do you hit yourself on the head asking why did you buy insurance. No, your happy you did because if you did have a car accident you would owe much more then a small premium. If you are serious about learning about options and making money with them go to www.allmarketpicks.webs.com