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Sooner or later, most investors
realize that the stock market isn't completely insane yet. Good stocks don't
always go up. Bad stocks don't always fall. Reality is rarely as bullish or as
bearish as Wall Street analysts and strategists have predicted. All that is
certain is that this virtually invisible force known as volatility is always
lurking, threatening to upset the delicate balance of markets. Investors have
two primary ways to react. You can sit tight and act like long-term investors.
Time tends to reward such behavior, although research has shown it to be as
difficult to practice as it is uncommon. Most investors never hold stocks long
enough to take advantage of the fact that the market rises over time. Investors
usually buy too late and sell too early. They are routinely greedy and panicked
out of stocks. They only hold stocks for a few years, or worse, a few months,
rather than carefully curating a portfolio over decades, meaning most investors
act like salmon swimming upstream. They fight against the natural rhythms of
the stock markets. Fortunately, investors can do something about this bad
cycle while smoothing the odds. All that is required is a willingness to use
options to navigate the stock market more effectively. A well-placed put or
call can make all the difference. Options have been around for centuries, but
the investment product has only been listed on exchanges since April 26, 1973,
when the Chicago Board Options Exchange began trading. Since then, the options
market has enjoyed exceptional growth. For example, in 2000, about a million
options were traded daily. In 2016, about 15 million options are traded every
day, and daily trading volume often exceeds 20 million contracts on days when
the Federal Reserve's Interest Rate Setting Committee meets or some other
important event. Who Uses Options? Pretty much everyone. There's a good chance
your mutual fund manager relies on options to manage their stock portfolio. The
same is true for pension fund managers, executives with concentrated equity
positions, stockbrokers, registered investment advisers, and self-determined
investors who are very interested and concerned about what is happening with
their investments. All of these different types of investors have one thing in
common: they know that a well-placed options contract can turn the
unpredictable of an investment into a defined outcome. First, let's define some
basic terms and concepts. We all know that stocks rise and fall. As such,
people are willing to trade the rights to buy or sell a stock, and that's a
good definition of an options contract. All options have an expiry date. After
a certain date, the contract expires. This means that in order to benefit from
an option, you must be right about a stock price movement within a certain
period of time. There are two types of options. A call option gives investors
the right to buy a stock at a specific price and time.
