Why You Should Trade Options

Why You Should Trade Options

by Simon Franco

Leverage Options are contracts that can be traded just like stocks. The reason you should trade options is because of the powerful leverage they offer. To fully understand the leverage we can look at an imaginary stock called XXX
This stock might be trading at a value of $40.00. To buy 100 of XXX it would cost a total of $4000, plus brokerage costs. If the stocks go up $5.00 then we have a profit of $500. So then we look at what options can do

The call option for XXX for the forward month would cost about $300, plus brokerage. Now, options give you the right to buy the stock, but you have no obligation to buy. So when the stock price goes up so does the option price. The option price will rise in accordance with the stock price. Each option has a variable rate by which it can rise, but "at the money" options will rise at the same rate of the stock. So the same $5.00 price rice is applied to the at the money call option. The Call option is now worth $8.00, and can be sold for $800.

So from the above example we see that the same profit can be realized without outlaying a greater amount of money. For the stock, the outlay was $4000, whereas with the options contract the outlay was $300. And then the profit was the same.

Protection

Options can give you protection for your stock. A put option is a contract that allows you to sell your stock at a pre-determined price, within a given time period. It gives you the right, but does not force you to sell the stock. Put options can be thought of as insurance. Insure your stock in the market. It really is a smart idea. It will cost you but then all insurance costs. It is good to have a piece of mind knowing that you stock cannot go below your options price. If you only have one reason to buy options, this should be it.

Stock Recovery

Options can be used to recover losses in the market. There are lots of strategies you can use with options and this strategy is called the stock recovery option strategy. I won't cover it here in detail, but I will tell you that by using this combinations of options, you can quickly recover any losses you have had in the price of your stock when the market goes bearish.

Extra Income There is a strategy to use with options over stocks that will produce you a regular income. The covered call strategy is used to get monthly income from stocks that you already own. Even if you don't own stocks, you can use this strategy with options to create a regular income. It is used by lots of people to supplement there existing income and can be a true wealth building tool.

Mix and Match Options, when used in conjunction with CFD's, stocks, futures, and forex give you a powerful way of creating income and capitol growth. You can mix and match these tools to get the best outcome for your trade. You must however, understand how each of these work to be able to fully utilize them.

Education in all of these areas is necessary before you begin trading. To ignore the rules and trade options or any of these tools will cost you a lot of money and wasted time.