Investing in options is good if you like some form of versatility in your efforts. It is very different from investing in bonds or mutual funds which are a lot more rigid and take longer time to mature. Depending on which way you see it, it can be a speculative or conservative exercise.
Simple or complicated?
Investing in options is actually a lot more complicated than other forms of securities. It is actually among the riskiest form of investments around. Hence, this engine is very suitable for trained and seasoned investors. If you are a beginner starting out to put your money into the markets, options might not be your first choice.
How does options work?
When you buy an option, you enter into a contract which gives you some form of right over an underlying asset. You are not obligated to do so but you do have the right of say on whether to buy or sell the underlying asset at a specific price. On top of that, you have a say on the date of the transaction as well.
In simpler terms, the word option is used to define a preferred choice. For instance, you would like to purchase a house for RM100,000 but do not have the funds to do so for the next 6 months. Naturally, you will want to ‘book’ this property from the owner. Hence, you negotiate with the owner to be given the ‘option’ to buy the property in the next 6 months.
Nothing comes for free which means the owner will agree to this option if you pay him a RM5,000 so-called security. If you agree, then you pay the amount. However, the option is still yours as to whether to exercise your right to purchase the property after 6 months. If you do not, then you forfeit the RM5,000.
Because of this agreement, the owner is obligated to sell you the house after 6 months for the amount agreed. This is regardless of whether the property price has suddenly spiked or reduced. This simply means that when you buy an option, you have the right to something but not entirely obligated to do so.
In most cases, it involves properties or real estate but it could be in other forms of investments as well. If you plan to venture into this type of investment, you need to be careful and read all the clauses properly before entering into the contract.