Are you looking for a straightforward way to invest in the stock market but not to bother with individual shares? You could consider investing in index options.
If you’ve never bought a stock before, it can be challenging to understand how investments work or what they mean if your investment isn’t performing as expected.
This article is about some common misconceptions about investing in footsies and cover, which might find an attractive option for their portfolio.
What are index options?
An option is a type of security that gives investors a right – but not an obligation – to buy or sell a stock at a specific price on or before a certain date.
If you’d like to gain exposure to the FTSE 100, you can do so by buying call options (giving you the right to buy) or put options (giving you the right to sell). If the index is above the strike price at expiry, your option will be in-the-money and worth something. If it’s not, then your option will expire worthless and out-of-the-money.
What is an HSI index option?
The Hong Kong Stock Exchange has its index: the Hang Seng Index, which covers all of its most prominent companies. It can trade its index through UK Options and HSI Index Option.
HSI index options have a minimum price of 0.01, which makes them affordable even if the value of the index has gone up considerably since you bought the option – a good fit for those with a limited investment budget.
How can I buy or sell?
To access this market at all, you’ll need to open a stockbrokers account.
It is pretty straightforward and can be done online these days – many discount Brokerage firms offer easy sign-up processes.
If your account is set up, you can place orders from home or on the go using your phone or tablet device as well.
When choosing a brokerage firm, make sure it offers competitive fees before opening an account – there are some very affordable Brokerage firms on the market, but there are also quite a few which will charge you more than they need to.
If your account is set up, you can access everything you need through the trading platform – it’s easy for beginners and advanced investors alike.
There are few things more versatile than index options.
They have been around for a long time and play a significant role in the trading world.
The flexibility they offer is attractive to many market participants both as a tool for speculation and hedging risks.
Hedgers, speculators & arbitrageurs
All three significant traders can use an option: Hedgers Speculators & Arbitrageurs. We will only examine hedging in this article.
HSI index options should form part of your portfolio because there is not just one way to use these options; you can benefit from them in many ways.
Hedgers
Hedgers usually are concerned with protecting themselves against adverse price movements.
The most common type of hedger is the producer who uses options to reduce the risk of short-selling his produce when prices fall.
He would buy put options to protect himself against a price fall and sell call options when he expected prices to rise and wanted protection if they did not move in his desired direction.
He aimed to recover some of the margins between buying and selling prices lost by selling at a fixed price for future delivery rather than instant cash; this margin differential constitutes the basis risk that is hedged by his option transactions.
Another type of hedger is a business with some long-term contract involving a commitment to pay for goods and services in the future.
This business wants to protect itself against rises in the cost of raw materials over which it will have little control.
E.g., electricity or interest rates, so it buys put options on these commodities and locks in prices at the current level.
Link to ETF investing for more information.
