Trading options can be quite scary for some investors. They have a bad rep for being volatile and dangerous, a thing that conservative investors file under “day trading” or even taking a big risk for your money with minimum expected returns. Its reputation isn’t entirely wrong. To those that have tried options trading, they say it is similar as day trading.
Maybe, all this bad rep is just blown out of proportion. With just the right tools, care and knowledge, trading options in Australia are doable – even for those conservative investors.
Options in an important aspect of an even broader investment strategy. They give you the right, but you’re not obligated, to sell or buy an underlying asset before an expiry date, that allows you a bit of time to speculate on the future price of the stock market.
In Australia, the options market is quite different from the US one. It is small and usually illiquid. In the US, the options market is big and growing fast. It is still possible for Australian investors to quickly and easily trade US options through online brokers.
Typically, most investors will deal with exchange-traded options on stocks and indices and there are two types: a call and a put. A call allows you to purchase a stock at a specific price, while a put allows you to sell it. You can purchase puts or calls or you can even create and sell them – this particular process is called “writing options”. This process can be a little bit complicated than purchasing stock but you’ll have no trouble figuring it out. The options you purchase is good enough for a specific period of time – after that, they simply expire when unused.
To put it simply, options are a low-cost way to take a stand if you think there will be a big shift or a big move that will come in the market. Think of it this way: You think Apple will have another big launch with a new product, that will boost their market price, but you don’t have a lot of cash to invest? Purchasing calls can let you get some of those without a huge cash commitment.
There is another strategy that you might want to consider – something that is low-risk that can boost returns from your dividend stocks when the market is stagnant. There are stocks that pay a good dividend whether through good or bad times. These types of stocks are the cornerstones of a lot of portfolios. Since these stocks aren’t big growers, you can consider a low-risk option strategy called “writing covered calls” so that you can boost your returns.
This is a very simple strategy that any investor can use. “Covered” is what makes it low-risk since we own the underlying stock. Also, we’re writing the calls, which means that we’re selling to someone else the right to “call away” stock we do own at the preset price.
Think of it this way: Writing covered calls won’t make you get rich quick. But if the worth of the company’s stock has steady, incremental growth, with a solid dividend yield annually, wouldn’t it be ideal to own a stock that way?