OPTIONS

Options are contracts that give the options holder the right (but not the obligation) to buy or sell shares of an underlying security at a pre-established price, called a strike price, for a set period of time. Each option has a buyer, called the holder, and a seller known as the writer. Investors often use options to hedge an existing investment. TWO BASIC FORMS OF OPTIONS:
1. 2.

Call option Put option

Advantages of options
1. We can buy stocks at a lower price 2. Less Risk 3. Higher Potential Returns

4. More Strategic Alternatives

5. Increase income against current stock holdings

Disadvantages of options
Options are so complex that it requires a close observation and maintenance. 2. Unlimited risk is involved in the short selling of options 3. The cost of trading options can be higher on a percentage basis than trading the underlying stocks 4. Options will expire at a fixed point in time and lead to most trading expire worthless. This is applied to the traders that purchase options. 5 There is a Risk of loosing your entire investment in a relatively short period of time. 6 Regulatory agencies may impose exercise restrictions on options.
1.

Investment strategies
Covered call writing: the simplest option strategy is the covered call, which simply involves writing a call for stock already owned. this is a strategy in which an investor sells a call option on a stock he owns. The call would not get exercised unless the stock price increases above the strike price, till then the investor in the stock can retain the premium with him. this becomes his income from the stock. When to use: when an investor has a short term bullish view on the stocks he hold. this strategy is commonly known as buy-write Risk: if the stock price falls to zero, the investor loses the entire value of the stock but retains the primium,since the call will not be exercised against him. Reward:limited to (call strike price-stock price paid)+premium received Breakeven: stock price paid-premium received

Protective call
This is a strategy where an investor has gone short on a stock and buys a call to hedge. in case the stock price falls the investor gains in the downward fall in the price. Incase there is an unexpected rise in the price of the stock the loss is limited. When to use: if the investor is of the view that the market will go down(bearish) Risk:limited.maximum risk is call strike price stock price+premium Reward: maximum is stock price-call premium Breakeven: stock price-call premium

Long straddle
The Long Straddle or simply a Straddle, is a volatile option strategy that profits no matter if the underlying asset goes up or down. it is used when the stock price/index is expected to show large movements.
A Long Straddle works based on the premise that both call and put options have unlimited profit potential but limited loss When to use: the investor thinks that the underlying stock/index will experience significant volatility in the near term. Risk: limited Reward/ profit: unlimited Breakeven: Upper BEP: Strike Price + Net Debit Paid Lower BEP: Strike Price - Net Debit Paid

Short straddle
A Short Straddle, is the opposite of long straddle. it is a neutral option trading strategy that profits when a stock stays stagnant. It is a strategy to be adopted when the investor feels the market will not show much movement. this is a risky strategy. When to use: the investor thinks that the underlying stock/index will experience very little volatility in the near term Risk: unlimited Reward:limited to the premium received Breakeven:
Upper BEP: Strike Price + Net Credit Lower BEP: Strike Price - Net Credit