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Like The Stock, Perhaps You'll Like The Leap Option Better
By Larry Lane for www.InvestorZoo.com
There has been much written on the dangers of stock options and derivatives. The term "LEAP option" may sound foreign,christian louboutin store, but it is relatively easy to understand.
Several ways to buy the same stock
A derivative or option is an investment based on another investment. Did you know there are two ways to purchase a stock? You can buy it outright now,clearance christian louboutin, or you can purchase the right to buy it at a later date.
Real life example
For example, let's say you'd like to purchase Cisco Systems. You can purchase 100 shares of Cisco Systems for $23.92 (its current trading price as of this writing). In this example, you are a long term investor. Instead of spending $2392 for 100 shares, you decide to purchase 1 long term leap option. You can purchase the Cisco January 2011 call options with a strike price of $12.50 for $11.90. The call option price of $11.90 is added the $12.50 strike price, yielding a total purchase $24.40 per share. Since purchasing one call option equals 100 shares, your total purchase price is $2440 plus commissions. After purchasing your call option, you can purchase Cisco anytime between now and the 3rd Friday of January 2011 for $24.40 regardless of where the stock is trading.
Let's look at the advantages and disadvantages of this transaction
1) Exercise your option if Cisco is higher than $24.40. $24.40 is your base price, and any price above $24.40 is considered profitable. Instead of spending $2392, you only had to spend $1190. You can use this extra money to deposit in a money market or short term bond to pick up perhaps 1-2% extra interest in a money market. Please note you will incur transaction costs to exercise your option.
2) Sell your option. For every buyer there is a seller. If Cisco is trading considerably higher, you may have a profit. Instead of taking inventory of 100 shares of Cisco, you can simply sell back your option for a profit.
3) Cisco has tanked and is now trading at $20.00 per share. Your $11.90 you spent on your option is worth somewhere around $7.50; a $4.40 per share loss or $440 (remember this is based on a 100 share lot). Again, you can exercise your option which wouldn't be a wise move since it's under water.
4) You can close out your position and take the loss. While the $440 loss is a tough pill to swallow, you only tied up $1190, not $2392. Thus freeing up money to pursue other investments.
Please note if you decide to purchase an option, you are not eligible to receive dividends.
The good and the bad of options
Like every investment asset class, stock options have their positive and negative aspects. They can be very volatile and can experience large swings in price. Fortunes have been made and wiped out by those who overleveraged their portfolio. It is not uncommon to see an option rise or fall 25% or more especially in a volatile market or during earnings season. However, if traded for the right reasons, stock options can reduce risk in your overall portfolio. By freeing up investment capital, stock options can also improve flexibility. Instead of tying up $2392 by purchasing 100 shares of Cisco Systems you can purchase another option to balance your portfolio or park the extra money in a CD or short term bond or money market.
Additional Education
If you are looking for additional information on stock options, I highly recommend you visit the Options Industry Council?s web site, www.888options.com for more information. On their site you'll find non biased information on different types of stock option trades, videos as well as short quizzes to reinforce their education material available online. They also host basic, intermediate and advanced classes by experienced financial professionals for free across the country. Even if you are not considering options as an investment, I would attend. By meeting like minded investors, your investment options will be opened to new possibilities.
Larry Lane is the editor for www.InvestorZoo.com, a social networking site specializing in personal finance
No statement in this web site is to be construed as a recommendation to purchase or sell a security, or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr.,Buy Christian Louboutin Pumps, Suite 500 Chicago, IL 60606 (1-800-678-4667).

Larry Lane is the editor for www.InvestorZoo.com a social networking site dedicated to personal finance.
Article Source: ArticlesBase.com