Why Options are Safer than Stock!

We prefer to trade in stock options.

While many will tell you that options are high risk; even tell you horror stories about people losing everything trading in stock options.

How do you know which is the truth?

Let's take a look at stock ownership. What can happen if you buy stock?

Stock can go up in value

The price can go down.

The price can go sideways.

If the value goes up you make money. If it goes down you lose money.

And in the third case you don't directly win or lose but in fact it costs you money in two ways. The direct cost of brokerage and fees. And the indirect cost known as opportunity cost.

Opportunity costs result due to your inability to invest in other opportunities hence the loss of the opportunity to make additional profit.

So if you purchase stock you can only make money if the stock price goes up.

Now some of you may be thinking, "But what about shorting?"

Again this is another possibility but is does involve some complicated strategies coupled with uncapped risk. Based on this it is not an approach we would recommend.

You see, when you short a stock, you actually sell a stock that you don't own. And your intention is to then buy the stock back at a lower price. The price difference is your profit per share.

But can you see what the problem is here?

Can you see what would happen if the stock price went up? Also what would happen if it when up a lot?

Having traded the stock at a lower value when you have to buy it back it costs you more resulting in losses which can be catastrophic.

Once again you can only make money when trading in stock if the value increases.

You also need to consider another aspect of owning stock and that is the cost; it can be very expensive.

If you purchase 100 shares of a $50 stock it will cost you $5000. And if you buy it on margin it is still $2500.

That is a lot of money to outlay. And, more importantly it is a lot of money to put at risk. Especially seeing that you only have a one in three chance of the stock moving in the right direction.

Plus as stocks don't trend all that often you not only need to pick the right direction, you also need to be able to pick the right time.

So we can say that trading in stock is not all that easy and it can be expensive.

But how do options offer an alternative?

To start with you have less of an initial investment. You can invest about 2% of the stocks value but still have the control over the stock.

So in the example above, instead of investing $5000, we might only have to outlay $100.

Plus, if you select the right strategy, you can profit no matter whether the stock price goes up; goes down or even goes sideways!

In addition to this you are reducing your risk. The most you can lose is your initial investment of $100.

But the best thing of all is the leverage that options provide.

In the above example, if the stock price goes up by $5, the profit on the stock trade would be 10% or on margin, 20%.

However with a similar increase in value an option could increase by about 100%. Your profit would be 100% on the option which is 10 times more than on a straight stock trade.

So by not accepting a commonly held view that the owning of stock is the least risky option you give yourself the chance of learning how to trade using options; opening up a good vehicle for your investments.

This article is offered for educational purposes only. It is not intended to provide you with financial advice. The information shared is gained through personal experience of what has and has not worked. Should you be considering trading or investing in stock you should seek the advice of a registered licensed advisor.

Article Source: http://www.rightarticle.com

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