There are several advantages of trading options over trading in normal stocks (shares). There are unfortunately also a number of things you need to watch out for. Let us look at a few examples.
The popular advantage of options is that you can make a lot bigger profits than if you should invest a similar amount of money in normal shares. The reason for this is what is called leverage in trading circles. Let us say you’ve got only $100 to invest and the price of your favorite stock is $100. So you can only buy a single share. Not a big deal.
Let’s see how it works. If you have $10,000 to invest and the price of a particular share is $100, you can buy 100 of those shares. If the call option on that share sells for $2, you can buy 1 option and spend only $200. For this $200 you can control 100 shares of the stock also, similar to buying 100 shares of stock. Unfortunately, as we said, leverage is a double-sided sword. If the underlying goes up, you make be a very prosperous option trader, but if not, you could lose your shirt.
However, if you trade options for a while, then you quickly learn that this leverage can be risky. It takes a while, but eventually you’ll see that it’s much better to use spreads if you plan to make any consistent returns with options.
Options traditionally used to be utilized to hedge another investment you already have. Let’s say you have shares in a company whose share price jumped up by 25% the past month. By investing in put options (which will cost you a fraction of the cost of 100 shares) you can protect your investment. The way it works is that, should the share price drop, the value of the put options will rise with the same amount. Your net investment will therefore remain the same. This is a rather old strategy. In today’s world, there are many better ways to hedge a portfolio. We prefer using spreads to just buying calls and puts.
Find out more about option trading and how it works. With the right option trading system in place you will make lots of money. Set up your future today with a great way to earn cash!