For most readers of my blog this is an avoidable post. My simple, sincere, honest advice is stay away from options.
However there are some die hard borrowers (leverage lovers) for whom options are tempting…and many times fatal. Options are risky is a right statement for investors. However if you are a trader who holds a position for a day (or worse a few hours and you are a day trader) options may be a better choice.
Any investment position is risky if there is a time frame to it. For example if you need money on 15th June, 2011 you are better off keeping 80% of that money in a bank fixed deposit and 20% in equity. Or in a Short Term MIP. The reason is it is difficult to predict a one year performance of the equity market.
Similarly in options the scary part is it has an expiry date (In India you can buy 1 month, 2 month or a 3 month option only). However in other stock exchanges (abroad) you can buy Long Term options (3 years!) – obviously the risk here is less than the 3 month option. If options can go to zero, remember so can equities.
Too many people will baulk at the thought of keeping equities for 3 years, such people might as well be in options – after all if you can get the upside by investing 15% of the capital you might as well protect the other 85% by keeping it in Index funds or bank fixed deposits.
Please stay away from options if you do not know how it works. Disciplined leveraging is an oxymoron for most retail players.
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