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Option traders use Call option contracts to benefit in a rise in the underlying share price. Options trade at adiscounted price to the share. Therefore, instead of outlaying the full value for the shares, you can benefit in arise in price with less exposure of capital.Example:
QQQQ QQQQ Dec 51.00 Calls
Price $51.07 $2.33 Number 100 shares 1 contract
Total Value $5,107.00 $233.00
To purchase 1 QQQQ Dec 51.00 call, we would spend $233.00 (not including brokerage). The equivalent valueof shares is $5,107, giving us “leverage” over a rise in the share price.
Using the same principles for decision-making for investment with stocks
Purchasing long-term options requires a smaller investment to hold value of the same underlying stock position. Example; $10,000 of stock might be approximately $1,000 of option value. Gives you leverageexposure over the stock.
Risking smaller amount of investment capital to gain a larger percentage of profit.
Can Buy an option that benefits from the markets increasing.
Can also adopt defensive strategies if the markets change conditions.
Gives you time to decide whether or not to purchase the underlying shares, but still benefitting from any potential gainin value.
Lack of understanding can cause investors to pay too high a price for options or to purchase wrongoptions to suit expected goals.
Education and practice are required to gain a thorough understanding of options. This takes time and patience.
100% of position could be lost if position is not managed correctly
Different strategies could be adopted depending on the investors outlook for the stock and time-framefor investment