Reducing risk using options in the stock market


What are the risk today?

 

With missiles about to fire from North Korea and interesting Presidential decisions in USA, shock waves are rippling into the stock market.

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For those that are in stocks investing (Singapore), choppy times comes with great opportunity. 2017 has proven itself to be an interesting time to invest in. The returns are still there but the risk has increase (or it appears to be). By value investing, we would want to buy good business and at great valuations.

By that thinking, we would be investing in the undervalued Oil sector right now. Guess what, your YTD (year to date) would be -17.28% (source: YTD for XLE ETF). OMG. With limited funds and with market being overvalued now, what are the options (pun intended) do we have.

Introducing: Options

 

This literally give my life options (pun intended). Options are a type of derivative security. They are a derivative because the price of an option is intrinsically linked to the price of something else (ie: You can buy/sell an option of Apple stocks).

In layman English, an option is a contract/promise that is set between two parties. For an option to work, we need to have a fixed set of terms and conditions. An insurance contract is a form of option contract.

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XXX Insurance company promises the buyer full coverage in an event of a car accident (condition). With that condition, the buyer pays $2000 in premium for that peace of mind. When you are buying insurance, it is like you are buying a put option in the stock market. You are buying protection. 

How can options help reduce risk?

 

There are two types of options contract. A put option and also a call option. While there are many ways to reduce risk, let’s focus on a buy put option. Let’s say you are investing in a good company, Apple. The stock price has been increasing and you are taking good profits. By because of bad news, the stock comes tumbling down and you won’t know whether it will recover.

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Would that make you worried? If it does worry you, you can consider buying a put at Strike Price $150. This means that whatever the price is, you have the RIGHT TO SELL your stock at $150 during the time period of your contract. No matter what the price plunge to, you will be able to sell your stock at $150. It is a form of insurance you can get to protect your risk.

 

What if you can reduce risk and increase returns?

 

This sounds like a modern day myth. Is there a way to significantly reduce risk and STILL increase your return?

By investing in options, the cost to buy an option is a fraction of the cost of buying the stock. As a result, the investor stands to earn more per dollar invested – options have “leverage” power. By understanding the power of options, we can both reduce risk and also increase returns!

Wait a minute. So good meh? Of course, every investment is a gamble IF you don’t understand what you are doing.

There is only one way to understand more about options.

 

What you can do to learn more?

 

Continuous education. We always emphasize again and again the need to receive continuous education. For those that are interested, you can spend roughly around 1 year to read and understand these 5 books about options.

Top 5 books about options

Otherwise, you can consider learning from the best in Singapore.

Introducing, Options Investor Teng Kenyuan. Recently featured on the Business Insider Singapore, he talked about the mistakes are preventing investors from being successful.

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Teng is also the inventor of his own Linear Regression Options Strategy. Now, he generates 6 figure sum every year using 15 minutes every month. He also runs several business including Yoonly Enterprise, a leading memento maker in Singapore.

One of the top mistakes that he feels investor make is they invest without understandingThis is a quote from the Business Insider article.

“It’s funny how people won’t pay $3 a day to get properly educated, and would rather throw a huge sum to someone or some company to invest for them.

“When the investment goes south, they have nobody to blame but themselves,” he said.

Journeywithmoney has the privilege to work together with him in his next upcoming workshop. For those that wants to discover how to discover how to gain the unfair advantage for accelerating your wealth, visit Build A Passive Income Stream to register for his upcoming sharing.

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