Pluses of an option
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The stock price sold off sharply on those news, and I decided that this was an opportunity to add to my existing position. Since I am low on investable funds, I decided to sell some puts on British Petroleum.
Buying a call option is the opposite of buying a put optionin that a buying a call gives you the right, but not the obligation to buy the underlying futures contract at a specific strike price. So when you see a price of. The reason being is three-fold. Second, if you are an entity or individual that uses and needs a physical ethanol plant cornAirline Company fuelwheat miller wheatcandy maker sugar or cocoaand need to protect your bottom line profit against rising prices before you have to purchase the underlying commodity then buying a call option is a way to do this instead of buying the futures contract and being at risk of margin calls.
I posted this over the internet, and had a reader ask me exactly what that means. As a result of this question, I am going to try and respond to this request.
A put is an options contractthat allows the options buyer to sell a number of shares at a given price at a given date in the future. The number of shares per each options contract is People buy put options in order to protect themselves from a decline in prices, and thus they want to limit their losses.
Those who purchase put options are therefore either hedging their exposure, or outright trying to place a bet that prices are going to decrease. For the right to sell a number of shares at a given price into the future, the options buyer pays the options seller a premium. This is essentially the cost of the bet behind the option.
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The premium is essentially the price that the put options buyer pays to the put options seller. The put options seller receives the premiumand has a few potential outcomes for him.
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As a result, I would have to pluses of an option shares of BP for every options contract I sold to the buyer of the put option. In both first and second outcomes, I am not eligible to receive any dividends on British Petroleum, since the buyer pluses of an option the put option holds those shares in their own brokerage account.
If exercised under the second scenario, I would own some shares in the British oil giant, and receive those fat dividends assuming they are not cut or suspended.
Astute readers can see that as long as the stock price is flat or up, I get to keep the premium.
If the stock price is down, I get to buy shares in a company I am interested in, but at a lower price. It is a win-win for me, that slightly tilts the odds of success in my favor.
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However, I used the premiums from the puts I sold to purchase shares in British Petroleum. This means that for every put contract I sold, I was able to buy 5 shares in British Petroleum. I will be earning a nice dividend check on those shares for years to come, since I rarely sell those companies that at least maintain their dividend payment. The nice part is that I would have earned those shares only because I have good credit with my brokerage.
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Here comes the danger in selling puts however — the possibility for wipeout risk due to overleveraging. This is why it is important to be very careful when playing with leverage, which is akin to playing with fire.
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I only sell puts sporadicallyand only do it on companies I would like to buy outright, but whose prices are little too rich for my taste today. Long-time readers also know that I have more than one stock brokerage account, which further reduces wipeout risk.
An ESOP basically allows an owner to sell the business to his or her employees, who then become shareholders of the company. This can be an attractive option when you read about the potential tax benefits and implications for your employees — not to mention your legacy — but proceed with caution. This type of plan is not a good move for every business.