Optionality

An option gives the right to buy (‘call’) or sell (‘put’) shares at a fixed ‘strike’ price, but only before an agreed date when the option expires. The person selling (‘writing’) the option needs to judge whether the price will rise or fall, and by how much. They hope the option will expire unused, meaning they keep the premium paid by the buyer for doing very little.

Insurers are like option writers – homeowners pay premiums to receive a payout in case of disaster. Insurers calculate premiums using similar probability-based principles to option writers. If in doubt, they overcharge; few homeowners know how to price risk and would still insure even if they did. So optionality, exploited correctly, can be quite profitable.

• Watch Tim Bennett’s video tutorial: What are options and covered warrants?

Merryn

Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.