The Appel Financial companies uses option contracts as a
useful tool to increase equity holdings, or to hedge against
investments in mutual funds or bond funds.
Call options are
contracts providing the right to buy 100 shares of a security at a
specific strike price by the expiration date.
Put options are contracts to sell 100 shares at a given price.
Option trading is useful for several reasons:
- Financial liability is limited to the cost of the option, a
fraction of the cost of the underlying security;
- Leverage: small percentage gains in underlying
securities produce sizable percentage gains in option values;
- Downside protection is provided against market swings;
- Risk protection: options identify an exact profit zone,
are time-sensitive and totally liquid. The holder of an option
contract can exit any time
prior to expiration date.
Option contracts are sold against blocks of 100 shares, and
commisions and fees are charged for trading options which makes
the cost sometimes too high for smaller investors.
