Options and warrants are derivatives, meaning their value depends on the value of the stock, so you should have done an underlying analysis of the stock’s prospects before you start considering buying the options. One of the most attractive, but equally dangerous, aspects of options is that they can give you the ability to get more for your money.

Essentially, an option is just what its name suggests: it’s an option to buy or sell shares at a certain price, as if you were to say to a friend, “If you ever want to sell that car of yours, I’ll give you five hundred pounds for it. not your friend to have to sell you the car – but he they can I’ll sell it to you at that price.

Yes, that is a childish example. But it’s a pretty important distinction between options and some other derivatives, like futures, that you have the option and you can let the option expire. With futures, you have no choice: you to have to exercise them. Traded options give you a third choice: In addition to exercising the option (buying the stock) or letting it expire, you can trade it on the market. you can have a to call Prayed bitch Option: A call option gives you the right to buy the shares at a certain price, a put option gives you the right to sell them at that particular price. (In fact, very few traded options are exercised; that’s not what they’re there for.)

Option pricing is a terrifyingly scientific job if you do it right, involving the Black-Scholes Formula. I’ve actually used the wretched thing and it’s hard work unless you have a certain aptitude, and I think I can confidently say that it’s an aptitude I don’t have.

A simpler way of looking at option prices is that the option has two potential sources of value. First, the intrinsic value, the difference between the share price now and the ‘strike price’ of the option.

The premium (ie price) of the option should reflect both sources of value. Remember that options are wasting assets as they expire on a certain date: if you buy an out-of-the-money option and hold it until it expires, its value will gradually decline until you have lost all your money. So buy and hold is not a strategy that works with options like it does with stocks.

Obviously, if you think the stock price is going up, you’d buy a call (you could just as well short a put), and if you think the price is going down, you’d buy a put.

There are all kinds of strategies that options traders use to generate income and returns on capital: puts, straddles, collars, etc. I’m not going to cover them here – they’re for the trader, not the investor, and if you’re primarily an equity investor, they’re probably not very relevant to you.

The easiest way to use options is to increase your investment in the stock you want to buy, getting more exposure for the same share. You may decide to use options rather than buy the underlying shares if you think the share price movement will occur suddenly, for example, if a regulatory decision is looming, such as the High Court bank charges case or regulator’s decision of water on pricing. you could use options to take a position on it.

But you can also use options to hedge your portfolio. Suppose you own water shares for dividend income, but you are worried that the water regulator will make a very adverse decision. It’s not worth trading in and out of your entire portfolio if you want to keep holding the stock as long as the decision is a good one. Instead, you could defend against downside risk by buying a put option.

An important caveat that should accompany both options and warrants is that they can be very illiquid, with large spreads. Another key concern is margin calls – these occur when an options trading account no longer has enough money to support open trades. Due to the leverage effect of using options, these margin calls could potentially wipe out an investor, so you’ll need to be especially careful when using options to trade volatile stocks.

Finally, you should be aware that these are very technical markets and you really need to do your own research if you are going to use these products.