Friday, 21 February 2014

Should you bother with options, rights, or warrants?


Options are relatively complicated financial instruments.  Most people lose money using options.   The obvious question is whether you should even bother with using options.

Options do have characteristics that make them unattractive to some investors:

  • Options contracts have short lives, and investors could lose their entire investment if the stock price does not change in the predicted direction within the time frame.
  • Investors could lose their entire investment even if the stock price moves in the predicted direction after the time frame.
  • The risk of loss is not limited when selling uncovered calls or puts.

There are also a number of reasons for using options:

  • Investors can profit from using options without having to invest larger amounts to buy the underlying equity.  In other words, investing in options costs a fraction of the cost of buying the stock.
  • Returns on invested funds from the use of options is much greater than investing in stocks.  
  • The risk of loss is limited to the cost of the premium paid on the option when buying options.
  • Mini options were launched on March 18, 2013.  They represent 10 shares of stock, as opposed to regular options contracts, which represent 100 shares, with the aim of creating a broader audience for this market.

Rights and Warrants

Understanding what rights and warrants are can assist investors in determining a course of action when faced with having to make decisions about them.


Options, rights and warrants

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