Options trading sometimes seem cloudy in secrecy, when really it is a straightforward method of investment, being employed by big expenditure companies and by individuals. Sometimes, the world media takes pleasure in growing the fear because a wayward worker has made secret and stupid investments utilizing derivatives such as options, and thereby dropped a massive amount of cash.
This kind of press exposure has resulted in trading options having a poor status. The reality is that most honest buyers use options as a means of relieving risk, not increasing it.
How does this work? A good investment company, say, may have purchased a big number of stocks in a particular business for its clients.
If the market crashes for some reason or any other, this will have an effect on the prices of this company's stocks, even if the company is fundamentally sound. Most purchasers will attempt to sell the shares as soon as possible, but often cannot find a purchaser to stop the carnage.
Nevertheless, if the investment firm buys a 'put' contract on the shares that it holds, this gives it a solid guarantee that they'll be able to sell the shares at a certain fixed cost, even if those shares are investing much lower at the time. In effect, the firm is purchasing a kind of short term insurance to ensure that its investment is protected to a particular amount. In this way, it protects its customers from heavy losses, and at one time guarantees its status.
On the other hand, say a major company plans on creating a new widget in the future. The anticipations can make quite a lot of interest in the stock, and stock prices develop as a result.
In this case, an investment firm may want to purchase up large blocks of stock for its purchasers, but at the greatest achievable price. So, before the madness starts, the company may purchase the right to purchase the stock in the future at a set cost (this is called a 'Call Option' contract).
This then is a guaranteed cost that it can pass on to their clients. Normally, if the stock has increased in cost over that period, the clients will gain from the foresight of the expenditure company, and will make an immediate income.
We at Global Diversified Partners partner with your to re-claim your decision making, and ultimately your future.
Our goal is to be the investment firm of choice for individuals seeking to diversify their portfolios into tangible assets, not just paper ones. Daniel Kalenov, Global Diversified Partners has a global focus and we're opportunistic, but prudent. We help people take control of their financial well being by educating them on the benefits of investing in tangible assets and by altering their perception of what “smart investing” means.
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