subject: Options As A Strategic Investment: Risk Management [print this page] For some investors, options as a strategic investment is great because they can take advantage of the market fluctuations. Not just that. They can also minimize risk because they provide an established lengthy of time for investment opportunities. Option investing involves a contract that is agreed upon by two parties. The investor is called the option holder who buys or sells stock. This is clearly stated in the contract which is fixed in a set price called the exercise or strike price. The option contract used in options as a strategic investment is usually is good for 9 months. In the event that the holder does not exercise these options as a strategic investment contract within the period, it expires and become worthless.
Basically, there are two types of option contracts or options as a strategic investment the call and the puts. A call is the option to buy stocks at exercise price while the put is the option to sell a stock at contracts exercise price. In the options as a strategic investment, the option contract is viewed from the holders perspective. This is so because the holder has the right to exercise the contract before it expires. In case the contract expires before the holder takes action, the contract expires. These options as a strategic investment, when not exercised, both the holder and writer may close the option contract.
There are two basic strategies that holders and writers use the income strategy and the hedge strategy. Both these options as a strategic investment involve buying and selling of calls and puts. These protect the stock portfolio or provide additional income for the portfolio. Both these options as a strategic investment involve risk. But this depends whichever side of the transaction you are. For a clearer view, income strategies allow the writer to sell either the call or put and receive premiums. The writer has the obligation to the holder to buy or sell underlying stock during the options as a strategic investment period until it expires.
Hedge strategy on the other hand, protects one against long and short stock position in a declining or rising market. In case you own a stock, you sure want to minimize your losses in case the market falls thus this is where this options as a strategic investment comes into the picture. This is done by purchasing an insurance or place options as a strategic investment at exercise price or above the stock price. Here, once the market declines, the trader can exercise the put and sell the stock to corresponding writer. The premium paid by the option holder is the maximum loss in these options as a strategic investment.
Options as a strategic investment has incremental benefits. One is, they allow the investing company to access resources at a fairly low cost. For example, when the targeted companys business is to create and develop a technology which the investing company think will yield great profits, the latter will make options as a strategic investment in the former rather than developing its own technology. This options as a strategic investment obviously cuts down the cost of developing that technology to a huge extent.
by: meliss
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