Why Would I Trade Options Over Stocks?

Why Would I Trade Options Over Stocks?

May 22, 2020 | 0 comments

If you are looking to expand your portfolio, then you might consider investing in options. A lot of investors are wary of trading in options, but you can actually generate a consistent income with options if you study the markets and invest carefully.

What are Options?

An option is a contract which allows you as an investor to buy or sell an instrument such as a stock, ETF (Exchange Traded Fund), security or even an index at a pre- set price by a certain date. A contract usually has 100 shares of a particular stock.

You can do a number of things with an options contract:

  • You can buy or sell a stock at a price that is agreed upon (this is called the strike price) for a certain span of time.
  • You can sell your options contract to another investor.
  • You can keep the contract until it expires and then walk away with no further financial obligation.

The thing you need to keep in mind is that options are not like shares since they do

not give you ownership of a company the way shares do. Very simply put, options

trading is betting on the price of stocks to go up, down or even to hedge a trading

Position.

Why Choose Options Over Stocks?

Many investors choose options trading over stocks because:

  • Buying options requires a lower initial investment than buying stocks.
  • You have more time to allow your money to reap the benefits of compounding.
  • As an investor, you are protected from downside risks because you are able to define risk and benefit before entering the trade, so you know the different possible outcomes upfront with a reasonable degree of certainty.

That last point is the main reason why investors choose to trade options. Let’s say you think that a company’s stock price is going to go up, then you can use the call option to get the right to buy shares at a particular price at a later date. If your feeling is right, then you get to buy those shares at a price that is lower than the current market price. On the other hand, if you happened to be wrong, then your financial loss is limited to the price of the contract you bought. By using a debit spread, we are able to reduce the risk of being wrong so that you can gain some upside and reduce downside by collecting premium on the contracts sold to finance part and sometimes even all of the cost of the option being used for the directional movement 

This type of investment can be lower risk than many other forms of trading because of the defined nature of the risk and the gain.  The strategy can also be used to generate income – as long as you use your options spreads wisely and follow a strong risk and money management strategy. Options can even generate income when stocks do not pay dividends.

Should You Trade Options?

While there is no yes or no answer to this question, it is best to ease into trading options slowly if you are a novice trader, or to use a reliable trading service that can do the heavy lifting of sifting through charts for you and one whose years of experience you can leverage while you learn the options market. One of the reasons why we sell our trades is so that people can earn while they learn. Even more experienced traders and investors understand that regardless of your level of expertise, copying the trades of trading services such as Lots of Options, to guide them and offer recommendations on trades. In fact, by copying our trades and trade adjustments in real time, even as a novice trader, you’ll be able to learn from us while we do all the work.  Think of it this way:  just as investment banks have many traders, methodologies, and people picking their trades, you too can benefit from learning and watching our trades and those of other reliable services so you can become a better trader. 

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