Robert A. Bonavito, CPA PC

NJ Forensic Accountant Explains Stock Options

Today we're going to talk about options, stock options.Options have a very important role in the economy. Basically, they do three things, options. They provide income, they provide protection, and you can use them for speculation and hedging. Protection and hedging are basically the same thing. The thing with options, why...what makes them so powerful is that they're low cost and you can leverage your money. So if you have, for example, Amazon stock when we talk needs about $1,000 a share right now. It's a lot of money. But for $100 you can buy an option on maybe 100 shares of Amazon. So options are great if you know something is going go up or down.

But basically, here's how you should use options. To provide income is number one. You can have what's called a covered call. Covered call is great because what you're doing is someone's paying you for the right to buy your stocks. So if you have a $100, 100 stocks, they'll pay you to buy those stocks if they go up to a certain price. Guess what? If they don't go up to the certain price, you keep the money. Okay? So you make income on stock in your portfolio.

The second thing is protection and hedging. For example, if you are concerned, your stock is way up and you don't want sell it because you don't want pay tax on it, but you want protect yourself if the stock goes down, you could hedge. You know, you could do what those hedge funds do. What you do to hedge, let's say you hedge it against the S&P 500. So you would bet that the S&P 500 was going go up. So if your stock went down and the S&P 500 went up, you would break even, basically. You lose money on your stock but you'd make money on your option.

Most of us here, most of us think of options as speculation. This is what most people use options for, speculations. You know that you work for a company and the earning's going to be really good and you're in a situation where you're able to legally buy the stock, or you can buy a call, a lot of calls, or if you really feel confident about the earnings of a company, you can buy a call and make a lot of money, or if you think it's going to go down, you could have a put.

Buy anyway, options are really important, something you may want to spend. They're complex, but you could use options simply. Like the covered calls are easy to do. A call option is very good, easy to do. And a put option is very easy to do. So what I would suggest if you're interested, learn as much as you can about it and use it because they definitely are worthwhile. If you have any questions, feel free to email me.

Return to Video Gallery