Trading Options – Why?
Options trading provide several benefits than any other investment vehicles, including the stock market or even the Forex. Let us look at some:
Leverage
Purchasing a call option gives the investor a good option position that’s similar to stock position. For example, if an investor would purchase 300 stocks selling at $50 per share, he would have to pay $15,000. But if he would choose to purchase three $20 calls (each contract representing 100 lots or shares), he will only have to pay $6,000 (3 contracts X 100 shares/contract X $20 market price). The investor would then have an extra $9,000 to spend or invest on his or her discretion. The process is obviously not as simple as that. The investor would have to know which call to purchase to have a good option position, similar to stock position. However, if you’re looking for a good investment without risking large sum of money at once, option trading is the better choice.
Limited Risk
Investment is said to be for the risk takers. This is good if your risk automatically yields to profit. But that’s not always the case. In options trading, however, you can have unlimited profit potential and at the same time have limited risk. This is because options trading only give you the right to purchase or sell underlying asset, and not the obligation. Meaning, if the price isn’t right at the end of the contract, you can just ignore and let the contract expire. If, however, you can profit for the change in shares prices, you can assert your right and pursue the contract.
For example, you purchase a certain call option for $20 (strike price) that will end on the third Friday of March. On the expiry date, shares you bought are trading at $25. Definitely, you can instantly earn $5 per share and would have to pursue with the contract.
What if the shares at the expiry date is lower than the strike price?
Let us imagine that the shares you’ve bought went down to $15 or even $5 at the end of the contract, do you’ve to pursue the contract? No!
You just have to let the contract expire.
What have you lost then?
The option premium you paid the seller. Nothing more.
Unlimited Profit Potential
Say a certain call option you’ve purchased is now trading at $38 per share. You can exercise your right to purchase it for the strike price of $20 and earn $18 minus the Option Premium you’ve paid. This is just an example. The price of shares can go higher than that. And if you’ve carefully chosen your call, you can get the best profit without breaking your bank. Note: if you’re planning to pursue the contract and purchase the shares, remember that you’ve to pay the full amount.
Tags: Leverage, limited risk