options in a nut shell

I'm not going to go into in depth detail about options right now. That will come later. What I want to inform you readers right now is the gist of what options are, how they work, and how they benefit you.

You see options are a special breed of investment. The main focus for you to think right now is leverage. Leverage is the ability to control a lot of something with a little bit of something.

There's a famous quote out there, "give me a right spot to stand at, and a long enough lever, and I can move the earth." This is true, leverage gives you power that you cannot yourself have.

before I go more into the leverage benefits of options, I want to explain exactly what options are. To you investors options are almost a must have in your portfolio. (remember, keep diversified) Options are a contract you have between your self and the contract writer. You buy 100 shares of stock at a fixed amount. If you are the one buying the option, then you are buying calls. 1 call = 100 shares of stock.

Now this fixed price thing. Let's say you bought 1 call of xyz company currently trading at $30.00 a share at a strike price (the price you buy at) for $31.00 (that's $3,100 value)  ok so now you are controlling  100 shares of stock for only 31.00 dollars. Once price of the stock exceeds the strike price, you're in profit. the stock say soars to $35.00 (that's $3,500 value) you sell the contract to someone willing to buy and you pocket $400.00 ($3,500 - $3,100 = $400)  if the contract expires worthless. (all call options have an expiration date) before you are profiting, you do have the potential to lose your initial investment (in this case, $31) The risks can be bigger or smaller depending on how you play it.

do you see the leverage there??? It's amazing. The fact that you  control 100 times the amount of shares at the cost of one.

There are a lot of variables, however, that determine whether or not the price of the call goes up or not. Time Decay, interest, etc. It's best you not stop learning about options with me. I'm just providing a quick overview, it's best you research a LOT more about options.

In fact if you are a new investor, chances are your brokerage will not let you trade options right away. You have to submit an application for it. Anyway, I hope all this was helpful to you in some way!

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