The Advantages Of Trading Stock Options

Posted by Paul on 13th, 2008

Just recently, options in stock trading have been getting the attention they deserve from many traders. However, for quite some time now, investing on options has created quite a stigma in the market especially with the financial media and a few popular figures attaching such implications that trading options may be too risky or dangerous.

What you should knowing about trading options however, is that there are a lot of advantages that one can get from it. And as long as you are smart in handling your trades and with the use of the right strategies, you may be able to prevent risks from actually happening.

Cost Efficient

One thing about stock options is that they are well capable of leveraging or borrowing money in order to increase returns. It can be very possible for an investor to obtain option positions that copy stock positions without going overboard with the cost. A strategy known as a stock replacement, allows mimicking stocks possible but in a cost efficient way.

For example, for you to be able to purchase 200 shares of a $50 stock, you must pay $10,000. But if you were going to purchase a couple of $20 stock options, with the options representing 100 shares each, then you would only have to outlay $4,000 instead of $10,000. As an investor, you would be able to gain $6,000 for you to use in your discretion.

Of course, the whole process may not be as instant and as simple as the example provided. But if you are able to choose the right stock option for the process, then you may be successful in your attempts for this strategy.

High Potential Returns

Another fact about stock options is that you can actually spend less money, but still make almost the same profit. Because of this, you can surely expect to gain a much higher percentage of returns as compared to normal stock trading. Of course, this would mean that you can actually earn so much more and your investment can surely pay off.

More Investment Alternatives Are Offered

Another very good advantage in trading options is the fact that they can offer more strategic alternatives for investment as compared to traditional stocks. Because options are very flexible, there can be a lot of way to use them.

Take in mind that options are actually the rights to trading a particular stock, and so, there may be various ways that an investor can actually use these rights to benefit him or herself.

The use of these options allow an investor to trade not only through stock movements, but through the passage of time and unpredictability in the market as well. And this can be very beneficial because most stocks rarely move significantly. Options strategically offer alternatives for a trader to do business in every type of market.

These are only a few of the major advantages of trading stock options, but as you can see, they are enough reason to tell you that going into this type of market can really be beneficial. With the low costs, direct access to stock options through the Internet, and with such benefits at hand, it is no wonder why stock options trading have become a part of the financial circles these days.

15 Responses to “The Advantages Of Trading Stock Options”

  1. Rob - Credit Card Debt Law
    Well said. The only thing that I would add is emphasis on the fact that options are risky and one should only trade them within their risk and experience levels.

    June 14th, 2008 at 4:47 am
  2. Credit Card Forum
    Yes, option trading is great because you can have literally 10 to 100x the gain on a stock with the same amount of money. It’s a great investment tool which is often overlooked.

    June 26th, 2008 at 8:01 am
  3. DebtKid
    Recently options have been getting the attention they deserve? Do you have a source on that?

    Options have been around a long time. Granted, they are easier to trade now than decades ago, but for most investors they are still way too advanced of a trading vehicle. I know form first hand experience!


    July 1st, 2008 at 7:28 pm
  4. Shaun Rosenberg
    Options give you a great benefit. I would rather buy a call or a put on a stock then buy the actual stock. It just seems like they give you a better edge in all areas.

    http://www.stocks-simplified.com/options.html


    July 16th, 2008 at 7:07 pm
  5. Free Charity
    Sure option trading has a lot of potential… but it’s really hard to get the timing right. If your option expires before you hit the strike price, you get 0. If you had just bought the stock you’d still have that.

    August 29th, 2008 at 11:46 am
  6. bikini buying onlin
    I never liked trading online because they never fille you exactly where you want. I’ve even used brokers that allow you to set the sell rate and which you want but still when they fill it, they scrape some more ‘extra’ margin off and you still don’t get your order filled at the correct amount. It’s not that big of an issue for some but I don’t like companies that dip into your margin spread just to get a little ‘extra’ if ya know what I mean.

    Amber


    September 10th, 2008 at 4:23 pm
  7. George
    Good article and I agree that the advantages of trading options is plentiful but the risk of having the dreaded expiration come up is an element that does not exist with stocks and other less risky investments IMO.

    October 2nd, 2008 at 3:15 pm
  8. CreditZebra
    I agree. Options are complex for most individual investors and more suitable for active traders. That being said, a disciplined investor can use options to hedge stock positions against sharp market movements.

    November 18th, 2008 at 6:37 am
  9. English writing
    Well written article. Like rob i think that The only thing that I would add is emphasis on the fact that options are risky and one should only trade them within their risk and experience levels.

    Thanks for this great article, keep writing :)


    November 27th, 2008 at 4:41 pm
  10. Options Trading
    Options are a great investment tool, but they can also be distructive to your portfolio if not used properly. Make sure you do your homework, and understand all the risks involved, before venturing into this form of trading.

    December 1st, 2008 at 1:16 pm
  11. CreditCardAssist.com
    Options are an outstanding way to mitigate upside or downside risk in your stock portfolio, but they shouldn’t be entertained by the uninitiated.

    January 11th, 2009 at 11:37 pm
  12. May tinh xach tay ibm
    Thank you, I find this article informative!

    Options have a great deal of potential, but you should always remember that they are different from stocks. Learning how to use options properly requires a little effort on your part; however, once you have a firm grasp of the essentials, you’ll quickly find that options give you more flexibility to tailor the risk and reward of every trade to your individual needs.


    March 16th, 2009 at 11:35 am
  13. joe economist
    does your advice remain the same in the current economic climate?

    April 6th, 2009 at 2:48 pm
  14. Japanese
    I was really looking to get into trading online. I really didn’t know were to start but by reading this post, it has made it easier for me to understand.

    April 8th, 2009 at 2:44 pm
  15. Jacksonville Real Estate Agent - Brad Officer
    I think for most, options are still very difficult to understand or comprehend.

    April 14th, 2009 at 1:37 am

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