While exchange-traded options have been around since the 1970s, they’ve experienced a surge in popularity within the last couple of decades.
Here are some of the specific advantages that make options trading appealing to many investors.
Options trading comes with a certain level of leveraging power. Investors can obtain a position that is virtually identical to a stock position while saving a lot of money in the process. For instance, if you want to pay 200 shares of a $100 stock, you need to pay $20,000.
However, two $40 calls of 100 shares each would cost a total of $8,000, with two contracts multiplied by 100 shares per contract and the $40 market price.
This would leave the investor with an extra $12,000 to use at any time. While it’s not quite that simple, the overall savings can be huge to allow more spending freedom.
Lower Risk When Used Right
Buying options can be riskier than stocks in certain situations, but there are also times when less risk is present. It all depends on how you use options. They’re often less risky because they depend less on financial commitment than equities and are relatively invulnerable to the effects of gap openings.
Options are the most dependable type of hedge, making them safer than traditional stocks. Investors also tend to place a stop-loss order when purchasing stocks to protect the position, which stops losses below a specific price that the investor sets.
Options also offer a higher potential rate of return over traditional stocks, making them even more of a worthwhile investment than they already are.
It’s important to keep in mind, though, that the losses could be devastating (as much as 100% of your investment) if the trade doesn’t work out the way you want it to, but at the same time you have a good chance at making a profit.
A Higher Number of Alternatives
Another advantage of options is the larger number of advantages you can get with them. Options are flexible, and there are many ways to use them to recreate other types of positions, also known as synthetics. These positions offer investors several ways to obtain the same goals and providing plenty of usefulness.
While traditional stocks may require a potentially restrictive margin that the broker charges upon purchase, there aren’t any rules when playing the downside of an option. This allows for much more flexibility.
These advantages make options trading a popular decision for many investors. If you want to increase your profits while benefiting from increased flexibility, consider options over traditional stocks.
You may find that this decision gives you the results you want over other types of investments, and you can always take options trading courses to help you get the most from your investing practices.