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Review Call and Put Option Examples

E xperienced traders often take advantage of derivative securities, investments that move in price depending on the price of another asset, called the underlying asset. Call and put options are two of the most common types of derivative investors to understand before diving deep with this strategy. Reviewing an example of a call and put option can give you insight into how this trading strategy works and help you figure out if it’s the right approach for you.

Key Takeaways:

  • Call and put options are common derivative securities. These assets change in price as an underlying stock or asset changes in price.
  • A put option strategy takes advantage of an asset you expect to drop in price.
  • A call option strategy takes advantage of an asset you expect to rise in price.
  • Studying call and put options examples can help you put this strategy to good use.
  • With options, you reserve the right to buy or sell a specific stock at a specific price, called the strike price, before a specific date.
  • Options do not carry an obligation to buy or sell, which limits both potential loss and potential profit.
  • Hedging against risk, covered calls, spreads, and speculating on the potential rise or fall of the underlying asset are the most common strategies used with call and put options.
  • You can buy call and put options from your brokerage firm after receiving approval based on your knowledge of these derivative securities.

Call and Put Option Example

An option is a type of contract in which you pay a premium price in exchange for the right to sell or purchase the underlying asset on a specific price, called the strike price, by a specific date. If you decide not to do so, the option simply expires.

You can buy a call option if you think the underlying asset will go up in value by the expiration date. A put option makes sense if you think the underlying asset will fall in value before the expiration date.

Now that you know the call and put option definition, let’s look at a put and call option example.

Pretend you’re purchasing a call option with a strike price of $10. The underlying asset has a current stock value of $8, which increases to $14 before your expiration date. You decide to exercise your option to buy the designated number of shares of the underlying asset at $10 each. You can either hold on to those shares in the hope that they climb even higher, or you can sell them right away for a tidy profit of $4 per share.

Now let’s say you decide to buy a put option, also with a $10 strike price, after the stock rises to $14. You think it will peak and then drop back down again before the put option expires. Your prediction comes true and the price of the underlying asset hits $5. You exercise your option and require your buyer to purchase the contracted number of shares at $10 each for an instant profit of $5 per share.

How Call and Put Options Work

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If you purchase a U.S.-style option, you can exercise your right to buy or sell the underlying asset at any time until the option expires. European-style options can be exercised on the day of expiration, not before. Options contracts have varying expiration dates, with both long-term and short-term options available.

When you buy a single call or put option, it covers 100 shares of the underlying asset, with the stock price listed per share. Traders say an option is at the money when the strike price equals the stock price. A stock price below the strike price is called an in-the-money option. The term ‘out of the money’ describes an option in which the stock price exceeds the strike price. An in-the-money call or put option has the highest premium cost.

Benefits of Call and Put Options

The primary advantage of call and put options is the limited risk associated with these securities. You cannot lose more than you spend on the premium cost for the option. If you decide not to use the option, it expires without penalty.

Here’s another call option scenario:

  • You pay $200 for a call option contract. This gives you the right to buy 100 shares of the underlying asset. The strike price of the option is $40.
  • When the option expires, the underlying asset is trading $50 per share. Thanks to your call option, you can buy 100 shares at $40 each, or $400. You can then immediately sell them at the $50 market price to make $5,000.
  • Your profit is $1,000 minus your $200 option cost. This represents a 400% percent return on your original investment.

Consider how you can use this put option example in a declining market:

  • You have an index portfolio and feel bearish about its prospects. You want to ensure that you can retain 90% of its value, which is currently $4,000.
  • You buy a put option that allows you to sell the portfolio for $3,600 with an expiration date of 12 months in the future.
  • If the value of your portfolio drops, you only lose $400 plus the cost of the premium if you exercise your option.
  • If the value of your portfolio ends up increasing, you let the option expire without action and lose only the premium cost.

Strategies for Call and Put Options

Traders can take advantage of various strategies when it comes to call and put options. Some of the most common strategies include:

  • Hedging against loss in other investments. For example, you can use a call or put strategy to take advantage of price moves in an underlying asset that you own. If a stock declines in price, a put option can offset losses.
  • Speculating with options on a stock price that’s expected to increase. In this case, you can either sell a put option or buy a call option. Purchasing a call option limits risk to the premium cost and carries potentially unlimited profit. Selling a put option, on the other hand, limits profit to the premium price and carries unlimited potential loss.
  • Speculating with options on a stock price that’s expected to decrease. In this case, you can either buy a put option or sell a call option. When you sell a call, you limit your profit to the option premium. When you buy a put, you limit your loss and create potentially unlimited profit.
  • Establishing a covered call in which you already hold a long position on an underlying asset. You protect that asset by selling a single call option for every 100 shares you own. If your asset fluctuates only slightly, you can profit from the call option sale.
  • Using spreads in which you buy two different positions in the same options class. This strategy is used to shield funds against risk while potentially profiting from your prediction about the market direction.

How To Buy Call and Put Options

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When you buy an option contract, you are generally purchasing the right to buy or sell 100 shares of the underlying asset. The underlying asset can be a stock, a bond, an index, an exchange-traded fund (ETF), or another type of security. Options are available from most traditional brokerage firms as well as many online brokers.

Before purchasing options from a traditional brokerage firm, you must receive approval from your broker. The broker will ask you to complete a short form that evaluates your knowledge about options trading. After approval, you can trade call and put options on the open market as well as over-the-counter options deals that take place off the market between a buyer and a seller.

C all and put options allow you to benefit from market volatility while limiting risk. Reviewing each call put option example boosts your knowledge of this advanced market tactic. Many traders even use mathematical models to maximize their potential options profits.

Author:Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

The Ultimate How-To Guide on Investing After Retirement

W hen people invest during their careers, they plan to save enough money to fund their retirement. As a retiree, it’s also crucial that people make the right investment choices after their retirement date. The goal is to make one’s retirement savings last as long as possible. With lifespans increasing all the time, having the know-how on making smart investment decisions during this time can help you enjoy your retirement to the maximum. This is the definitive guide on investing after retirement.

Key Takeaways:

  • Opt for mostly steady income investments such as bonds, fixed annuities, and money market accounts.
  • Allocate a proportion of the retirement portfolio to growth investments like stocks and real estate.
  • Plan in five-year segments and don’t seek more growth than needed.
  • Retirement investment plans need to take into account beneficiaries and inflation risk.

How Should You Invest After Retirement?

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The challenge of investing after retirement is finding the right balance between safe investments that protect retirement savings and investments with enough growth potential to keep them from running out during retirement. A nuanced strategy is needed that achieves both investment safety and maintains a comfortable lifestyle throughout retirement. The most important thing to remember is that adjusting to bad investment decisions without a steady paycheck becomes difficult, if not, impossible.

The balancing act for investing after retirement is to split your portfolio into mostly safer assets, such as fixed annuities, bonds, and money market accounts while allocating a reasonable portion to riskier, high-earning assets, such as stocks, mutual funds, and real estate. The following sections provide more detail on these specific asset classes.

Safer Retirement Investments

The following investment classes generally provide steadier income streams for retirees but with less opportunity for growth.

Money Market Accounts

You’ll need a liquid source of money on hand to pay for essential bills such as food, mortgage payments, rent, and clothes. Checking accounts are not the best use of cash. It’s always worth considering placing the majority of your most liquid funds in a money market account where the money can earn interest. Shop around for better interest rates.

Fixed Annuities

A fixed annuity gives recipients a certain amount of income at regular intervals for a specific time period in return for a lump sum. Retirees often purchase fixed annuities to stabilize their investment incomes because the rate of return is guaranteed. The fact that annuities guarantee a certain level of return meets the needs of many retirees desiring a steady income stream. An immediate fixed annuity is a class of annuity in which the insurer begins paying income within a month or two of purchasing the annuity.

Bonds

When you purchase a bond, you loan your money to a third party. Bonds pay a steady rate of interest throughout a fixed time period. For retirees, bonds are attractive because the income they pay is steady and predictable. Governments, states, and corporations typically issue bonds to finance various expenses. Bonds can be a great way to preserve capital and invest in a way that is likely to keep up with inflation.

A more nuanced and even safer approach to bond investing is known as bond laddering. The idea is that the bond investor buys a series of short term and long term bonds. If the interest rate happens to rise as the short term bonds mature, the investor can re-invest the principal at the higher interest rate. Bond laddering is a strategy against losing out from changes in interest rates.

Growth Investments for Retirement

Retirees also need to make space in their portfolios for growth investments. The proportion of a portfolio to allocate to riskier investments with higher growth potential comes down to individual risk appetite. The following asset classes represent some growth investment opportunities for retirement.

Stocks

Investing in the stock market does not need to be a young person’s game. In fact, one rule of thumb for asset allocation says that the percentage of a portfolio invested in the stock market should be 100 minus their current age. Retirement planning is more complicated and personal than following this rule. However, it’s reasonable to say that most retirees will want to invest some of their portfolios in the stock market.

It’s important to point out that within the stock market, retirees need to pick the right stocks. Chasing huge returns from trendy equities could backfire, but knowing which stocks have the highest returns can result in more dependable growth than chasing fads. Investing in large corporations with a history of paying annual dividends can provide a dependable income from the stock market.

Mutual Funds

Mutual funds represent another opportunity to seek more growth. Mutual funds are managed portfolios of equities, bonds, and other financial instruments. Retirees seeking some growth in their savings can invest in equity funds, which are invested principally in stocks. Within the class of equity mutual funds, retirees can opt for funds based on investment approach from those that aggressively pursue growth to funds aimed at generating a steady income.

Real Estate

Not every retiree will be in a position to invest directly in real estate, but for those that are, the opportunities for growth are huge. Making smart investment decisions in undervalued property can provide steady streams of income from rent or large windfalls when selling the property.

For retirees lacking in the capital to directly invest in real estate, Real Estate Investment Trusts (REITs) are a viable investment option. REITs are companies that own various types of commercial, income-producing real estate. Investing in REITs can produce large dividends, however, this comes with the risk of higher volatility.

5 Rules for Investing After Retirement

T he precise way in which a retiree allocates their investments is highly individual and dependant on various personal circumstances. However, there are some general investment guidelines that are useful to follow. Here are five strategic rules for investing after retirement:

  • Don’t neglect inflation risk
  • Consider beneficiaries
  • Don’t chase higher growth than needed
  • Plan in five-year segments
  • Consider delaying Social Security claims

Don’t neglect inflation risk

Retirees face the risk of prices rising over the course of their retirement while income remains steady and doesn’t increase. Referred to as inflation risk, this rise in prices over time is the basis upon which it’s recommended to allocate a portion of one’s retirement fund to growth investments, such as stocks and real estate. Retirees understandably want to be more conservative with their investments, but inflation risk is real and some allocation in stocks to make room for income growth is wise.

Consider beneficiaries

An important part of any retirement investment plan is to consider beneficiaries. Retirees need to make sure that they leave an inheritance for their loved ones and that this money gets to their loved ones efficiently. Creating a living trust, while being a more expensive option than a will, ensures any property owned can be passed immediately to named beneficiaries without entering probate.

Don’t chase higher growth than needed

When retirees sit down alone or with an advisor to figure out an appropriate retirement investment plan, the broad aim is to analyze expenses and desired income and come up with an appropriate return rate for the duration of retirement. Chasing higher growth than what’s needed could come back to bite retirees because this strategy will lead to taking on unnecessary risks.

A useful tip here is for retirees to separate the assets they want to accumulate and pass on to loved ones from the rest of their retirement needs. By doing this, retirees can use more aggressive investment strategies for their estate-oriented investments without risking financial security during their lifetime.

Plan in five-year segments

It’s almost impossible to create one retirement investment plan with strategies that can cover a retirement spanning 30 years or longer. Planning in five year segments is a more realistic and sensible approach because lifestyles and income needs may differ significantly for retirees from one five-year period to the next.

Consider delaying Social Security claims

Retirees with a level of retirement income to meet their expenses can consider delaying their Social Security claims. For each year up to age 70 in which retirees delay their Social Security claims, the monthly benefit increases by 8 percent. In this way, a 66-year old who only begins collecting Social Security at age 70 can 132 percent of the monthly benefit they would’ve collected at age 66.

Conclusion

Retirees armed with the knowledge of their investment options and strategies during retirement

are much better placed to get the most from their retirement pots and enjoy their lives to the fullest.

Author:Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

Alternative Investments: Your Guide to These Diverse Assets

When you think of conventional investments, stocks and bonds likely come to mind right away. Experts recognize cash as the third investment in the conventional category, with all other investments classified as alternative assets. Learn more about alternative investments to up your finance game.

Key Takeaways:

  • An alternative investment is an investment in any asset besides bonds, stocks, or cash.
  • While many alternative investments exclude individuals outside those with the highest net worth, others are becoming more accessible to the casual trader.
  • Types of alternative investments include but are not limited to private equity, hedge funds, venture capital, commodities, real estate, limited partnership, intellectual property, tax liens, and legal settlements.
  • You can purchase many alternative investments through your existing broker, advisor, or financial institution. Some automated online investing platforms also offer this service.
  • Benefits of alternative assets may include preferential tax treatment, a high level of control, and potentially high profits.
  • Downsides of these investments include the lack of liquidity and the high risk level.

What Is an Alternative Investment?

Any investment outside of cash, stocks, and bonds is considered an alternative investment. Common examples include tangible assets, commodities, real estate, hedge funds, derivative contracts, art, antiques, managed futures, venture capital, and private equity.

These assets generally appeal to wealthy individuals, professional investors, and institutional investors who aren’t deterred by their high risk, limited regulation, and complexity. However, individual investors without the net worth necessary to invest directly in these products can purchase shares in alternative mutual funds and exchange-traded funds (ETFs).

What Are the Different Types of Alternative Investments?

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Each type of alternative investment has unique characteristics, so it’s important to carefully research the alternative assets of interest. Some of the most common choices include:

  • Commodities, including investments in coffee, corn, oil, precious metals, ethanol, natural gas, soy, cocoa, sugar, wheat, and other natural resources. You can invest in commodities to hedge your bets and protect profits against inflation. These assets are bought and sold on the futures market.
  • Private equity, in which you invest in a company that does not trade on the public markets. You will see a return on your equity investment only when the company finds a buyer, merges with another entity, or issues an initial public offering. Investing in a private company may also be a good fit if you want to participate in business operations and help guide its decisions as an early shareholder.
  • Venture capital, which is a subset of public equity in which you invest in a company that’s poised for stratospheric growth in hopes of going along for the ride.
  • Hedge funds are alternative investments designed to drive capital using various advanced market strategies.
  • Real estate, including residential and commercial investment properties as well as shares in private real estate investment trusts (REITs). However, some REITs do trade on the public market. You can also invest in a real estate development corporation or real estate limited partnership, or buy and sell mineral rights to land. Real estate is one of the most popular alternative investment assets because it appreciates over time for potentially impressive returns. However, factors like neighborhood property value declines and down housing markets can quickly turn profit into loss.
  • Master limited partnerships, which allow you to purchase shares in diverse construction projects like amusement parks, films, aviation, utility infrastructure, and other major capital expenditures.
  • Tax lien certificates, in which you pay off the tax debt on a property that’s set for tax sale. In most jurisdictions, the property owner has a legal obligation to repay you with interest or you have a right to exercise your lien on the home.
  • Trademarks, patents, copyrights, and other forms of intellectual property.
  • Private mortgage investing, in which you offer a loan to a property buyer that pays interest over up to five years. This reduces risk because the home serves as collateral and you only lend up to 70% of the property’s market value. However, craft a careful contract to avoid losing your shirt with this type of investment.
  • Structured settlements, in which you pay a lump sum to a person receiving monthly checks for a personal injury or similar claim. In exchange, you receive his or her settlement payments, which are regulated by insurance. Despite the low risk, this alternative investment lacks liquidity.
  • Farmland, which you can hold for a profit based on growth, sharecrop, or lease. With this niche investment, you should have at least some land or farming experience or partner with someone who does. This is also a long-term plan that takes at least five years to produce returns.
  • Franchises, which allow you to benefit from the name recognition of a major brand while owning your own company and either operating it or outsourcing management.

How Do Alternative Investments Work?

You can start putting funds in alternative investments through your existing financial advisor or institution. Some digital roboadvisors also allow you to trade alternative assets. However, they don’t offer the professional advice you may need as you get your feet wet with these high-risk investments.

If you want to start slow, consider so-called ‘liquid alternative’ assets like mutual funds and ETFs. These products take some of the risks out of alternative investments by providing financial reports and a prospectus that offers transparency to traders. In addition, ETFs and mutual funds are subject to regulation by the Securities and Exchange Commission (SEC).

When you decide to invest in a specific alternative asset, do careful research and review its implications with your advisor so you understand how this investment fits into your overall financial plan.

What Are the Advantages of Alternative Investments?

Some of the best reasons to consider trading alternative assets include:

  • Retaining more control over investment holdings than you can achieve with common stocks and bonds.
  • Distinctive knowledge in a particular area that gives you an advantage when trading a specific alternative investment, such as a long career in the gas industry for a utilities trader, for example. You might also have an interest in a particular area, such as tech, and want to support innovation in that area by providing venture capital.
  • Specific market conditions that make it the optimal time to invest in a particular asset, such as those who benefited from the real estate bubble of the late 2000s or the dotcom boom of the 1990s.
  • The tax advantages created by certain alternative investments, which are often preferable to the tax treatment of traditional investments.

What Are the Best Alternative Investments?

Some of the most promising alternative assets in the current market include:

  • Gold bullion, which diversifies a traditional stock and bond portfolio to shield it from market ups and downs. Investing in gold can also shield you from the effects of inflation.
  • Cryptocurrencies, sometimes called ‘digital gold’ by investment experts because of their comparatively high value. Do your research and choose a currency with a proven track record, such as Bitcoin.
  • Private debt, which lacks liquidity but can provide profits of up to 10%. Many investors enter several such contracts to create streams of income with staggered payment dates.
  • Art and antiques, consistently ranked as a top asset class for those who can afford to wait 30 to 50 years for a sizable payout.

What Are the Potential Downsides of Alternative Investments?

A lternative assets will not produce returns for up to 10 years. Investors cannot access the funds during that time since these assets are not freely traded on traditional markets.

These investments also carry high fees of up to 2% upfront and up to 20% at fund distribution. For this reason, it’s important to choose alternative investments with a proven performance record since they cannot be evaluated by standard stock market metrics.

Some alternative assets also create complicated risks you may be unaware of when new to that type of investment. For example, if you buy certain types of alternative investments through your individual retirement account (IRA), you may have to establish the IRA as its own business entity which subsequently must pay separate business taxes.

Author:Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.