Investors include in their portfolios investments like stocks, mutual funds and bonds, but they can also choose options, another type of security, very popular due to their versatility. They enable investors to adjust position depending on any situation that arise. Furthermore, there are more types of options you can choose and they are presented below.
The main types are American options and European options. Despite their name, they have nothing to do with geographic location.
● American options ca be exercised at any time between the date of purchase and the expiration date and a type of American options are the exchange-traded options (those traded on a regulated exchange where the terms are standardized by the exchange, in advance: the underlying asset, expiration date, strike price, quantity).
● European options can only be exercised at the end of their lives, at the maturity. Those types of options usually trade over the counter, while American options trade on standardized exchanges.
Those were options in a short-time context. But there are also options with holding times of one, two or more years, which are known as long-time options. They are also called long-term equity anticipation securities (LEAPS) and are virtually identical to regular options by providing opportunities to manage risks and to make speculations.
These opportunities are for a long time, but they are not available for all stocks. The later expiration dates give the opportunity for long-time investors to gain exposure to prolonged price changes without using a combination of shorter-term option contracts.
The simple calls and puts we have discussed are usually referred to plain vanilla options. Plain vanilla signifies the most basic version of an financial instrument, like bonds, futures, options and swaps. Plain vanilla options is the standard type of option, with a simple expiration date, a strike price and no additional features.
In contrast, there are the exotic options, which have more complicated features, special circumstances and even more risks. Exotic options usually require advanced knowledge about financial markets in order to execute them successfully and because of their complexity, they trade over the counter. Some popular examples are the barrier options, the chooser options, digital options and compound options.
As you can see, options are a very versatile financial instrument and investors have where to choose from. The difference lies in their complexity and the success and profit gains lie in the investor’s experience and capacity to manage them.