Stock options investing provide several investment options to make better use of investment capital. This is especially so for the short to medium term investors. There are three main reasons why people invest in stock market options. These can be summarized as leverage, volatility trading and protection. The investor achieves leverage in that to control the same amount of equity all he needs to use is a small portion of the total amount of capital needed. This is mostly applicable when one wants to engage in speculative trading that will take a short time.
Protection comes in that one has the ability to add on insurance into any trading plan. This is useful when there is uncertainty in the stock market. In such times the protective put stock options are purchased to shield a long stock position against a drop in the underlying stock price. Volatility trading happens when an investor decides to bet on whether there will be movement or no movement in the underlying stock price. This means the trader profits no matter the direction taken by the stocks.
How to exercise stock options
There are three basic ways to exercise stock market options. You can pay cash, you can swap the corporate stocks you already own or you engage in what is called cashless exercise.
The cash exercise is the most commonly used and is the easiest to understand. It involves a very simple process where you give the employer the required amount of money and in return he gives you the agreed upon stock certificate. In case you don’t have enough cash at the time of the exchange to pay the options in the stock market then you are forced to look for other alternatives.
Some employers though very few will allow you to trade company stocks you already hold so that you can acquire option stocks. When you take this route you have the additional advantage of deciding your limit in company stock. You must have held the swapped shares for the required period to avoid the exchange being taken as a sale hence having to pay tax.
In cashless exercise, you borrow from a stock broker the amount needed to exercise your options in the stock market and at the same time you sell your shares to enable you meet your costs. These costs here include taxes and the broker’s commission. Holding the stock till it’s about to expire and then selling it when its mature is a commonly used method in dealing with stock market options