Demystifying the World of Options
Most ETFs pay dividends. Some, like the SPDRs (SPY), pay out on a quarterly basis on the last business day of the month; others, like the Diamonds (DIA), make monthly distributions. The point is, knowing the basic rules by which the various vehicles operate will help you avoid potentially costly surprises.
Options Pricing: While option-pricing models can be very complex and one does not need to understand all the math involved, the two components that I think are essential to have a basic understanding of are implied volatility and time decay. For example, be aware that before an earnings or news report, the implied volatility of the near-term or front-month options usually increase to a higher level than the later-dated months. If you think Google (GOOG) will hit $400 in the next year, it makes no sense to buy calls that have only two weeks remaining until their expiration and only two days before the company is scheduled to report earnings. Instead, buy some LEAP options.
Pick the Right Tool: Make sure you understand the strengths, weaknesses and risks involved in each specific strategy. More importantly, make sure you then pick the strategy that best aligns with your investment thesis and will help accomplish the specific goal set for each trade or investment decision.
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