Why Trade Options Over Stocks
There are a number of advantages to trading options. First, options allow investors great leveraging power. With this, an investor can obtain an option position that can essentially mimic a stock position nearly identically, yet at a huge cost savings.
In fact, trading options has a very distinct advantage of leveraging investors' money by allowing a small amount of capital to have control over a much larger value amount of an underlying asset. This leverage means that for a smaller investment, the profit potential can be the same as if the investor actually owned a much larger position in the underlying stock shares.
Options provide investment flexibility as well in that they offer strategies that can help investors to make money in rising or falling markets, as well as in markets with no movement at all. And, options can even be used as a hedge to protect investors' profits in certain types of situations. Therefore, an investor may purchase or sell options in many different combinations in order to take advantage of nearly any market.
Depending upon how an investor uses options, they may actually have less risk than they would if trading stocks. There are many situations where buying options can even reduce an investor's risk. This is primarily because in many cases, options require a much lower financial commitment than purchasing the actual underlying asset itself.
In many cases, when an investor buys an option, the maximum amount of loss that they can incur is the amount of money that they originally invested. Yet, by trading in options, investors have the potential to achieve much higher returns – sometimes even unlimited returns. This means that investors could invest much less money in options than they do in the underlying stock, yet have the potential to gain the same amount, or even more profit.
Another advantage of options is that they allow investors to trade in what is referred to as the “third dimension.” This means that an investor is not just trading the movements of the option's underlying stock, but also in the passage of time and movements in volatility.
One of the other true benefits of trading options is their versatility. These investment vehicles allow investors the ability to adapt or adjust their position according to just about any type of situation that comes up. Thus, options can be as conservative or as speculative as an investor wants.
What this essentially means is that investors may use options to do just about everything from hedging or protecting an equity position from a market decline to outright betting on the upward or downward movement of a market or an index.
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