Online Money Manager
Buy-and-hold credit investment strategy
It is interesting to consider why an investor would want to get involved with complicated options when they could just buy or sell the underlying asset. There are a number of reasons. An investor can profit on changes in an asset’s price without ever having to actually put up the money to buy the asset. The premium to buy an option is a fraction of the cost of buying the underlying asset outright. When an investor buys options, the investor hopes to earn more per dollar invested than by buying the underlying asset; i.e. options have a leverage. Further, except in the case of selling uncovered calls or puts, risk is limited to the premium paid for the option, no matter how much the actual asset price moves adversely in relation to the strike price. Given these benefits, why would everyone not just want to invest with options?
Options are very time-sensitive investments. An options contract lasts for a short period, typically a few months. The buyer of an option can lose the entire premium, even with a correct prediction about the direction and magnitude of a particular price change if the price change does not occur before the option matures. Hence, investors who are more comfortable with a longer-term investment generating ongoing income, i.e. a buy-and-hold investment strategy, will rarely invest in options. Also, options are more difficult to understand than, for example, stocks. Investors who are not comfortable with derivatives might be hesitant to use them.
Welcome! My name is Eve Santori. I professionally deal with money management for almost 15 years now and this blog was created to share some of my knowledge with your. After graduation from Stanford University I learned a lot about thing that ordinary people find confusing and frightening, such as loans, mortgage or debt. I shared that experience in two books that I've published, but I also decided to offer the same information on my blog. So, there it is!