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In what way can small investors use options as a leverage tool?
As with subscription warrants, the options allow a certain limited leverage over the capital that you have and to control (for a fixed period of time) a greater amount of ordinary shares than when you buy them directly. For example, at the moment in which these lines were written, Intel was being quoted at 127, that is, $12,700 a 100-share pack. Well, for an option that will buy 100 Intel shares in a three-month term at a price of $125 each, was quoted at 12; that is, that only $1,200 were needed to control 100 shares of this company during the next three months. The options are fundamental “time tools” because they are issued with an expiration date; they are considered as “perishable assets”. For this reason, the buyer of options must guess the direction that the market will take in general, as to predict the price fluctuations of the shares along a determined period of time. If this temporary prognosis would fail, the worst that could happen to the buyer is to loose all its investment, but not more.
Although small investors are investing each time more in options, the results obtained are not usually good. This is mostly because most of them are after a greater revaluation and buy options with too long-term expiration dates. The truth is that they many times buy the “temporary value” of the option, which is condemned to drop while approaching the option its expiration date. Statistics show that 80% of buyers of options loose money, while that 80% of the sellers of options win money.
The option may be treated in a conservative way if one sells them as covered buying options; well, to gain greater profits by means of an additional rent represented by the premiums of the options, or well to impose a discipline establishing defined selling points. The sale of a buying option is denominated as “covered” when the salesman of the option already possesses the shares against which the option has been sold, shares that one can hand over if the price rises and the option is executed. Before investing in options, study well all the stock exchange market operations and look for an advisor of one’s total trust.