Unsplash photo by Nicholas Cappello
If the epidemic taught the globe anything about money, it was that it is critical to increase your wealth, whether by saving or investing. As jobs began to reopen and people were able to earn money again, some people began to invest in the stock market to provide a safety net. Although investing in the stock market can be a dangerous proposition, careful diversification can yield beneficial results and help you increase your bottom line.
You can start investing by adding individual stocks to your account or by investing in mutual funds, which already include a broad portfolio of professionally managed companies. However, given the market volatility in 2020 and 2021, you might want to consider diversifying your portfolio using options.
What is a Choice?
An option is a contract that allows you to buy a specific stock or index (a set of equities) at a specific strike price by a certain date. You lose the money you paid for the right to exercise the option if you don’t use it by the expiration date.
Consider the case of AMC Entertainment Holdings (NYSE: AMC), which you believe will grow to $60 per share in the following two months. You could buy a call option that gives you the right to buy it at that strike price within the next two months. If AMC goes above $60 before the expiration date, you can execute your option, sell the stock immediately, and profit. You lose the premium you paid for the option if the stock never reaches the $60 strike price and you don’t buy the stock.
Options for Indexing
To comprehend index possibilities, you must first comprehend: What exactly is an index? An index is a collection of equities that serves as a benchmark for an entire market sector. The Nasdaq-100 Index (NASDAQ: NDX) is a market capitalization-based index that includes 100 of the largest domestic and foreign non-financial businesses listed on the Nasdaq Stock Market. As a result, that index allows you to track the performance of the exchange’s largest companies, which may provide insight into the market as a whole.
The problem with an index like the NDX is that its current trading price is almost $14,000. You can’t buy an index, and buying the basket is out of reach for most people.
A Choice for the Inexperienced Investor
Due to previous growth and index success, Nasdaq recognized this hurdle and established a smaller index at a lower price point to offer all investors access to the companies included in the Nasdaq 100 Index. The Nasdaq-100 Micro Index (NASDAQ: XND) is worth about $140 per share, or 1% of the Nasdaq-100 Index.
Smaller investors might use options for a potential profit and exposure to the companies represented on the larger exchange because of the lower pricing.
Increasing diversity while lowering risk
As with any investment, do your homework and only invest when you’re completely aware of the tool you’re using and the potential losses. Dabbling in the new XND index with call options can be the perfect approach to integrate the vehicle into your portfolio because options don’t require you to buy.
(c) Benzinga.com, 2021. Benzinga does not offer financial advice. All intellectual property rights are reserved./n
