Leveraging options is a technique that investors can use to increase the return on their investment. You can do this by using options contracts to magnify the exposure to the underlying security.
When an investor buys an option, they buy the right, but not the obligation, to purchase or sell a security at a specific price. The keyword here is “right.” An option gives the buyer the prerogative to do something, even with their investment in rooftop bars in London, for example, but not the obligation. When you buy an option, you pay for the right to control that security.
You can also use options to protect your portfolio from downside risk. For example, if you were worried that the stock market would crash, you could buy a put option on the S&P 500. It would give you the right to sell the S&P 500 at a specific price. If the market did crash, you would be able to sell the S&P 500 at the agreed-upon price, and you would have protected your portfolio from any losses.
Decide what you want to achieve
The first step in leveraging options is to decide what you want to achieve. Do you want to increase your exposure to particular securities? Or do you want to protect your portfolio from downside risk? Once you know what you want to achieve, you can start looking for the proper options contracts.
Find an options broker
The next step is to find an options broker. Several brokers are out there, so it’s essential to do your research before choosing one. The best place to start is by reading online reviews.
When choosing an options broker, there are a few things that you should keep in mind:
- Fees: Make sure that the broker has low fees.
- Range of products: Make sure that the broker offers a wide range of products, including options contracts.
- Customer service: Make sure that the broker has good customer service.
Open an account and fund it
Once you’ve chosen a broker, you’ll need to open an account. It is usually a simple process. You’ll need to supply basic information, such as your name, address, and contact information.
Once your account is open, you’ll need to fund it. You can do this by transferring money from your bank account or using a credit card.
Choose a suitable options contract
Now it’s time to choose an options contract. It can be tricky, so it’s essential to do your research. The best way to start is by reading the terms and conditions of the contract.
When choosing an options contract, you’ll need to consider:
- The underlying security
- The expiration date
- The strike price
- The premium
Buy the option contract
You can buy an options contract online or over the phone. You’ll need to provide your broker with some basic information, such as the name of the security and the expiration date.
Leverage your options position
Once you’ve bought an options contract, it’s time to start leveraging your position. You can do this by buying more contracts or buying call or put options. Leveraging your option means that you’re using the contract to increase your exposure to the underlying security.
Monitor your position
It’s essential to monitor your position and ensure that you’re still in compliance with any margin requirements. You’ll also need to keep an eye on the expiration date and ensure that you don’t miss the deadline for exercising your option. Monitoring your position enables you to make any needed adjustments to your portfolio.
Sell your option contract
You can sell it to another investor when you no longer want to hold an options contract. You can do this online or over the phone. You’ll need to provide your broker with some basic information, such as the name of the security and the expiration date. Once your position is sold, you’ll receive the premium in your account.
When you leverage options in your portfolio, you can achieve several different goals, such as increasing your exposure to a particular security or protecting your portfolio from downside risk. It can benefit you to achieve a higher return on investment while still limiting your losses.