Hedging With Options Contracts
Buying and selling options contracts can be a great way to hedge your stock positions, as long as you know what you are doing. For those of you not quite familiar with Options Contracts, there are four basic options contracts you may use to leverage your way to a profit.
* Buying Call Options
* Selling Call Options
* Buying Put Options
* Selling Put Options
Many people enjoy trading options contracts to gain leverage over a stock position with little money used. When you buy an option contract, you have the option to buy, but are not obligated to complete the purchase. Unfortunately, when you buy an option contract, you pay a premium for the contract which is a non-refundable fee. Premiums vary from contract to contract, but regardless of the amount of the premium, by opurchasing an options contract, your position on this trade begins in the negative.
If you are following good fundamentals and are making educated decisions, this may not worry you too much because you are anticipating a favorable move in the stock to more than compensate you for this initial loss. If, however, you are just guessing like flipping a lucky coin, you might be better off donating your money to charity so you can have a tax write-off in the spring.
Here at BlackFlag, we do purchase and sell options contracts from time to time, but it is by no means our primary activity. Options contracts are primarily used when we feel there will be a significant move in a stock price, rather than just a couple points.
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