Explain how credit spreads work, we need to understand a little about options.

Options, as their most basic right, but not the obligation to purchase a specific period of time to sell something at a specific price. Options Essentially, a real situation, and on paper in a paper contract is bought and sold in the open market. Usually the CBOE (Chicago Board of Options Exchange).

Options give us options in the business world. The buyer and seller: choice between the two parties serve as a contract. Option rights of the buyer as the seller's obligations. When an option is purchased, an individual specific price (call options) a stock to buy or sell a stock at a specific price (put option) is the right purchase.

Walk a little further down. There are two types of options. The first is known as a "call option."

Let's use this as an example that displays real estate.Suppose you have $ 250,000 in a rural neighborhood and find a home for their analysis predicts that up to $ 300,000 for the house is going to go next year.If you were correct on your assessment of your investment at $ 250,000 off a $ 50,000 profit, a 20% return would yield.

However, in this case there is another option open.No matter what the market is the homeowner can afford the $ 12,500 and it immediately goes to. Let the home owner gives you a year in which to buy the house for $ 250,000.Home is $ 300,000 contract with the homeowner that you should appreciate to be worth $ 50,000.

Imagine if you had to buy the full $ 250,000 for the house you would have lost $ 50,000 in home value, certainly not a good day at the office. But if you bought only one option, would put you up to $ 12,500 to $ 250,000 to buy the right home within a year.

The same type of analysis can be used often in the stock market as well.

I give you an example: XYZ stock is trading at $ 140.00 per share. If I do XYZ in the next 2 months I have appreciated to $ 160.00 to 14000.00 and $ 100 to buy shares if it went to $ 160 and $ 16,000.00 profit I might sell their shares for $ 2,000.00 14 % is business going for a refund of my initial investment.

My second choice is that I have $ 600.00 to $ 140.00 in three months that I buy 100 shares of XYZ allows for an option to buy. If XYZ stock at $ 160.00 per share goes up to my choice in the next three months will increase to $ 2,000.00. I can sell your option for $ 2,000.00 233% return on investment of my business or leave a 1400.00 dollar credit.

An alternative or be more specific, a "call option" which I at $ 140 per share from the stock market between now and the next three calls to the right purchasing month I'm giving myself permission for the benefit of If the stock has appreciated by large amounts of money and I will need that has been for me to start buying stocks is avoided by putting ..

Unlike a call option, a "put option." If you buy a put option, you are right, and in the future at a specific price on a certain time and the stock "put" no purchase obligation.

Homeowners insurance you think about the purchase of every month. You buy the insurance for you in case your home decreases in value due to some catastrophic event in the defense.

Stock market is that every person thinks that something is up and being there for someone with the opposite opinion, remember.This means that they go to your broker and pay it back with the promise of shares to borrow in the future.

are.

First, your brokerage site and less than 100 shares of XYZ can go for $ 14,000.00.Goes down to the XYZ 120.00 dollars per share, after a few months then you 100 shares of XYZ at $ 12,000.00 to be able to buy and stocks to give back to your brokerage firm, the trade-off. Since you sold something for $ 14,000.00 and $ 12,000.00 for the buy back you a profit of $ 2,000.00, 14% are left with the return on investment.

could buy a put option for $ 160 per share. XYZ 140.00 a few months after the dollar goes down, your put option price of $ 2,000.00 (because you have 100 shares of its $ 120 12,000.00 per share or 100 shares of XYZ and buy at lower prices for would have the right to sell for $ 140 per share or $ 14,000 for 100 shares). This time its put option you sell you $ 1,400.00 to $ 2,000.00, a gain of 233% return on investment can give.

As you can see, the options to get your business reduce costs, thereby reducing your risk. And the analysis is correct, a greater return on investment by using options to realize the opportunity.

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