The simple truth is that options offer several appealing advantages over stocks -- even for true rookies who are just playing straightforward call- and put-buying strategies.
Here are four advantages of stock options that might convince you to try your hand at calls and puts. Low Cost of Entry This is simple arithmetic: options are cheaper to buy than the stocks from which they derive their value. Whether you've purchased shares or one call option contract, you're long shares of the stock.
However, when you buy the option rather than the stock, you lower your cost of entry dramatically. As a result, you're not only risking less, but you're also leaving more investing capital free for other opportunities.
Leverage That lower cost of entry provides a great segue into our next options-related benefit: leverage. Because an option is cheaper to buy than the equivalent amount of stock, there's greater potential for impressive percentage gains on your investment. Limited Risk The options benefits might incorrectly assume that options are options benefits risky.
The Bottom Line Exchange-traded options first started trading back in Here we'll look at the advantages offered by options and the value they can add to your portfolio. Key Takeaways Options are derivatives contracts that give the buyer the right, but not the obligation, to either buy or sell a fixed amount of an underlying asset at a fixed price on or before the contract expires. Used as a hedging device, options contracts can provide investors with risk-reduction strategies. For speculators, options can offer lower-cost ways to go long or short the market with limited downside risk.
Myths abound regarding the potential pitfalls of options trading, and the very mention of the word "derivatives" is enough to give some investors bad flashbacks to the financial crisis of However, if you're buying puts and calls, you're actually risking less capital than if you traded the earn money online review directly. In a basic option-buying strategy, your maximum potential loss is limited to the initial amount you paid to buy the contract s.
Flexibility For the most part, stock traders have two choices: long bullish or short bearish. Conversely, options players have a wide variety of strategies at their disposal. Calls and puts can be combined in myriad different ways to profit from any type of price action: bullish, bearish, sideways, and anywhere in between.
Seasoned speculators might ignore price action altogether, and instead use options to profit from dividend payouts or changes in implied volatility. Plus, options can be sold to generate income on existing stock positions, or to set the cost of entry on a planned share purchase.
Rather than limiting yourself to the stark black-and-white palette of stock trading, you can use options to fine-tune your approach for any market environment.