Ever wonder what makes more sense, trading stock or stock options? Ever wonder what the advantages of trading options are? The following article does a good job of explaining why it makes a lot more sense to trade options.
An option can be a derivative on an underlying security that gives the right, but not necessarily the obligation, to buy the underlying security at a certain set price.
They come with several strike prices, expiration dates, and permit tremendous leverage as every option controls up to a hundred shares of stock in a specific company. These positive aspects make options a far superior trading instrument than just trading stocks.
One advantage is leverage. Leverage will be the capability to make use of a small quantity of capital to control a huge asset.
As in real estate, where a small down payment enables a prospective buyer to control a huge piece of property, options allow the trader to control up to one hundred shares of stock with only a bit of capital or, in this case, it’s named the option’s “premium” which is the actual cost of the option.
Another benefit is that a trader can generate income by using credit spreads with options. When you notice that ABC stock is in a trading range and is remaining above $50 a share, you may create a credit spread by creating what’s known as a “bull put spread”.
A third advantage is options also provide you with the capability to short stocks without the restrictions of short-selling stocks. Whenever you short a stock with the expectation that it is going to go down in price you not only have a more substantial cash outlay, but you also have to pay interest on the stock you borrowed to short. You must pay the dividends back that the stock might pay during the time you hold it.
With put options, you avoid all that plus you’ll be able to make quicker returns and much sooner because the stocks will normally fall twice as rapidly as they rise.
The benefits written here are only a few compared to the dozens that options afford investors who are disciplined enough to learn them.
Stock and option traders that take the time to learn and apply a couple of simple techniques provided by options can better assess risks within the markets and probably put themselves into positions to profit handsomely.
