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Options Trading - the Advantages



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Options trading is an investment strategy that offers many advantages. One of the main advantages is that trading options requires you to commit less capital to an investment than a stock or other type of market trade requires. Even so, you can make as much or more profit as with other types of trades. This can mean more money in your pocket for a smaller investment.

It is possible to actually make a lot more profit, for a lot less outlay, and risking a lot less.

Check out the article Why Stock Options? for more information!

Some of the other benefits to options trading are as follows:

1. Leverage

Leverage or leveraging refers to the use of various strategies to maximize potential profit.

Leverage is created by making your investments work harder for you. In other words, leveraging is creating potential for bigger gains using a smaller amount of capital.

2. Hedging

You can also completely hedge long-term stock positions at a low cost.

In options trading, hedging means you can establish a position in one market (in this case options), to offset an exposure to price fluctuations in some opposite position in another market (here this means shares). This has the goal of minimizing your exposure to unwanted risk.

Options are a perfect tool for protecting your stock portfolio. You can buy options on your stocks like you buy insurance for your car. For a small amount of money you can buy options against a longer-term trade or investment and fully protect that trade or investment from market volatility (dramatic ups and downs).

3. Trading Up, Down and Sideways

Options give the trader plenty of extra scope to make leveraged bets on the direction of a stock; whether you believe the stock will go up, down, or move very little in any direction. This means that you can make money on stocks even when they are not making money.

4. Less Commissions

This depends greatly on which brokerage you use. Online brokerages offer discounts on options as there is a great deal of competition. This helps to keep options trading costs low.

Commissions on options are very open- there are no hidden costs. The commissions are a lot less than those charged for trading stock.

5. Risk Is Limited

Options allow you to create trading strategies with limited risk of loss, but with high probabilities of success. You have complete control over the exposure to risk.

6. Any Movement Can Be Good

You do not need to be ‘bullish’ all the time. (Bullish means that most investors would expect upward price movement in the stock market).

Options trading allows you to establish positions that earn you money when the market moves up, down, or trades in a range. Owning shares only allows investors to profit when stocks move higher.

7. Income

By selling someone else the right to buy your stock at a predetermined price, you are paid a premium that you can consider to be a special dividend through an option.

8. Indexing

If you wish to trade a diversified portfolio rather than just shares, there are options available on all the major indexes e.g. S & P 500, DJJA, Russell 2000 etc.

9. Opportunity

Options are available in a wide range of instruments, such as agricultural products, metals, foreign currencies, interest rates, soft commodities, index products, energy products, etc.

This leaves a wide scope for options trading opportunities at almost any time.

10. Liquidity

Transactions can be executed quickly and easily, so your money is not tied up for a long time as it is in trading shares. You can re-invest many times over in the same time that you might only trade once with shares. This means many more chances to make a profit!

11. Price Availability

Options prices are readily available from a wide range of sources, particularly from the Internet. This makes it easy for traders to monitor market movement, find the best entry and exit points, and determine future positions.

12. Reasons to Trade Stock Options

This section outlines, in detail, the reasons for options trading, in any type of market conditions, and the profitability that can be found in this type of investment.

Further Reading

Why Stock Options?

Most traders today still use stock options as pure speculation and don't realize the true potential of stock options. Now that we've reached a period that offers a low barrier to entry, it makes perfect sense to use options to their full advantage. Commissions are low and products are highly liquid. If you use the appropriate products, there is truly no edge now for the market makers.



Start Trading Options


As you can see, there are many advantages to options trading. If you want to start trading options, read this page on setting up and getting started.

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