Besides offering flexibility to the buyer in the form of right to buy or / sell, the major advantage of options is their versatility.
They can be as conservative or / as speculative as one's investment strategy dictates. Some of the benefits of Options are as under:
·· High leverage as by investing small amount of capital (in the form of premium), one can take exposure in the underlying asset of much greater value.
·· Pre-known maximum Risk for an option buyer
·· Large profit potential and limited risk for Option buyer
·· One can protect his equity portfolio from a decline in the market by way of buying a protective put wherein one buys puts against an existing stock position this option position can supply the insurance needed to overcome the uncertainty of the marketplace.
Hence, by paying a relatively small premium (compared to the market value of the stock), an investor knows that no matter how far the stock drops, it can be sold at the strike price of the Put anytime until the Put expires.
E.g. An investor holding 1 share of Stock "A" at a market price of Rs. 3,800 thinks that the stock is over-valued and therefore decides to buy a Put option" at a strike price of Rs. 3800 by paying a premium of Rs. 200 If the market price of Stock "A" comes down to Rs. 3,000, he/she can still sell it at Rs. 3,800 by exercising his put option.
Thus by paying a premium of Rs. 200, he/she insured his position in the underlying stock.
They can be as conservative or / as speculative as one's investment strategy dictates. Some of the benefits of Options are as under:
·· High leverage as by investing small amount of capital (in the form of premium), one can take exposure in the underlying asset of much greater value.
·· Pre-known maximum Risk for an option buyer
·· Large profit potential and limited risk for Option buyer
·· One can protect his equity portfolio from a decline in the market by way of buying a protective put wherein one buys puts against an existing stock position this option position can supply the insurance needed to overcome the uncertainty of the marketplace.
Hence, by paying a relatively small premium (compared to the market value of the stock), an investor knows that no matter how far the stock drops, it can be sold at the strike price of the Put anytime until the Put expires.
E.g. An investor holding 1 share of Stock "A" at a market price of Rs. 3,800 thinks that the stock is over-valued and therefore decides to buy a Put option" at a strike price of Rs. 3800 by paying a premium of Rs. 200 If the market price of Stock "A" comes down to Rs. 3,000, he/she can still sell it at Rs. 3,800 by exercising his put option.
Thus by paying a premium of Rs. 200, he/she insured his position in the underlying stock.
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