If you are a new investor, you may have heard about more seasoned investors using stock options to solidify their position. Or perhaps, one company trying to woo you may offer stock options as part of their compensation package. But what exactly are stock options?
Essentially, a stock option is an agreement that grants a person the right to buy or sell a stock at a given price at a specific time. One important thing to note here is that neither party has the obligation to buy or sell.
What makes stock options appealing?
To put it in clearer terms, consider the home buying analogy. Visualize yourself as a home buyer who has finally found your dream property, but unfortunately, you cannot immediately purchase the home due to current financial constraints. You talk with the property seller and ask him to sell you the home at a given price, promising to seal the deal within a specified period. If both of you agree to such terms, then you have something akin to stock options.
Now, this deal can go either way. If conditions favor you, you can end up paying less for the actual value of the home. For example, a new development within the area is announced — one that jacks up property prices in the area. And because you and the property owner have agreed on a specific price and you make good on your promise to purchase the property on an agreed date, you’ll end up as the winner.
On the other end of the spectrum, you can end up losing. Say, for example, a property inspector found asbestos within the home. Although you do not have to buy the property because you are under no obligation, you’ll still end up forking out a sizeable amount of money in the form of the option.
Despite their popularity, stock options can be risky, especially if you are still new to investing. Alternatives that you can explore that are similar to stock options without the associated risks include binary stock options.
In contrast to stock options, you do not have to buy a binary stock option or take ownership of an asset. All you have to do with a binary stock option is to correctly predict the movement of an asset’s price, within a specified time frame.
What this means is that the investment you make is held at a more stable position. The guesswork and other technicalities that are associated with other forms of asset trading are virtually eliminated.