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Transcript
Options allow you to engage with the market in different ways than stocks.
One of those ways?
Hedging.
Hedging is just a fancy finance term for protecting your investments against risk.
With options there’s a simple way you can do that.
Suppose you own 100 shares of Toastr, an exciting but risky company that produces smart toasters.
You bought your shares at ten dollars and now they’re 20 bucks a piece meaning you have a thousand dollars of profit, and even though Toastr seems to be handling economic turbulence well, they’re getting nervous.
It’s a tech company and the stock price of tech companies and that sector often seriously tumble in tough times.
So, you start to think: maybe I should hedge.
Well, here’s how that would roughly work.
If you bought a put option that expires in one year, you would likely be able to purchase it for only a small fraction of Toastr stock price.
Let’s say the put options contract with a strike price of twenty dollars costs a hundred dollars.
That’s ten percent of your total investment in return.
As the value of your Toastr stock goes down, the value of your put option goes up.
More or less, the put option ensures that you lose less than you would with just a stock investment.
And that’s hedging.
Options allow you to engage with the market in new and exciting ways.
They’re not for everyone, but for those who are ready to take the plunge, explore eToro options today.