WHY SHOULD YOU TRADE OPTIONS?
Here’s a question I get a lot, along with all its other permutations: “What’s so good about options?” , “Why not just trade stock?”, etc.
There are a myriad of reasons why I like to trade options, but let me tackle just a few of the main reasons for the purpose of this article.
1. Leverage – Most people have a good understanding of leverage when it applies to other disciplines. For example, if I qualify for a $500,000 mortgage loan with a 20% down-payment ($100,000), my initial investment is only $100,000 out-of-pocket to purchase a home worth 5 times that value. If I rent the property out to a tenant I will get substantially more rental income than I would if I bought a $100,000 house with all cash. Granted, I still have to make the loan payments, but I stand a better chance of getting qualified tenants in a more desirable location.
If I buy an in-the-money call option for $1000 and I think that that stock is going to rocket higher, I will reap the rewards of the call option gaining exponentially more profit than if I owned stock – plus my risk is capped at only the $1000 I paid for the option. Now just like the mortgage example above however, I still need to make “payments” to the seller of the option, in the form of time-decay, but that unfortunately is the price of doing business.
2. Being the House – Not only can I buy options, but I can also sell them, which gives me the ability to play the odds as if I were a casino owner and the market are the people sitting at the slot machines and roulette tables. What a great setup! Of course, like any casino owner will tell you, you will occasionally have someone who will be a larger-than-expected winner – but over time, you will eventually be the profitable one if you keep letting people play the game. Here are some articles on how to do this: http://optionboost.com/members/tag/selling-premium/
3. Protection – Who says that I have to pick only stock or options? I can combine these two investment vehicles to enjoy the advantages of both. Perhaps I want to buy puts on my existing long stock positions, or I want to sell calls on my long stock position to collect some premium (income) as every day passes, or maybe I want to sell some puts to have my stock positions grow when the stock pulls back and I get assigned more stock through the exercise of the puts.
There are many more reasons, but suffice it to say: Options give the investor flexibility to structure just about any scenario as well as the ability to flip any scenario the opposite way to bet against it.
Feel free to shoot me an email on the contact page if you have any questions.
Hope this helps.