If an investor does not have a lot of money but hasn’t interest in being as effective as he can making money in the stock markets, is there an alternative that he can use instead of just always having to buy a stock outright? The answer to that question is yes. I believe that stock options are a viable alternative for investors to assist them in growing their portfolios. Using options is not an alternative that one should use and not think of investing in the stock, but it is an investment tool that could be used alongside long-term stock investing. Let me explain why I believe it’s a good alternative.
I am going to use the S&P 500 SPDR exchange rate fund, the SPY as an example. As I write this article the SPY is trading at 157.88. If an investor is interested in getting into this ETF, 100 shares would cost about $15,788.00. Obviously, the investor’s intent is to invest because he believes the ETF will go up in value. If it goes up one point to 158.88 the value of the stock is now listed at $15,888.00. Buying the stock, the investor used almost $16,000 to make $100.
If the investor decided to use options instead of buying the stock outright, less money would have to be put on the table. If the investor buys an option that is priced just less than what the stock is presently priced at, it will go up in value as fast as the stock. In the case of the SPY trading at 157.88, that would mean any “call option” with the price of 157 or less. If the investor bought a call option (that goes up in value as the stock increases) it would cost much less but go up in value at the same rate as the stock.
Presently an option priced at 157 with about 60 days left to expire would cost an investor $275.00. If the stock went up to 158.88 the option would be worth $375.00. So one can see how using options can costs less than buying the stock outright.
Let me throw some caution out there to would be investors. It is important for one to do the research needed before one invests. If you are going to invest long-term in a company and you are interested in that stock going up in value, you need to do all the research you can to make sure that that stock is going to go in the direction you wanted to.
Investing in a stock option instead of the stock itself does not mean less research needs to be done. A responsible investor must still do the work necessary before investing in the stock or the option.
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