In options trading, you sell or buy an underlying asset like an Index, ETF, or security at a pre-defined price and time. If you are considering it, then you can learn it quickly. Actually, it offers more flexibility than stocks because the trader has no obligation to complete a transaction. Several traders prefer the slow-paced options strategy.
SteadyOptions is a good trading education center. It can help you gain an insight into the strategies to gain an edge and earn profits in the trade market. If you haven’t taken a plunge yet, then you can get familiar with multiple benefits of options trading and give a try!
Low capital requirement
The main reason to add options to your portfolio is that there is no need for a huge capital to start trading. It is expensive to invest in shares and stocks, especially young traders, who hardly have sufficient funds.
For example, the capital needed to purchase 50 shares of $100 is $5,000. Besides, consider the brokerage of 5%, which is extremely unproductive when buying a few shares. There will hardly be any decent returns, yet there has to be a price rise of 10% to break even.
On the other hand, the capital requirement would be $100 for iron condor strategy – sell $2 wide for $1, and for a put spread strategy, it could be $200 – sell $3 wide for$1. In options, you can execute some strategies at low capital.
Important note – Always consider the potential loss if the position moves towards a failure. In the above option strategy for the iron condor, the potential loss and profit are $100, whereas for the put spread the potential profit is $100, and loss is $200.
Options offer leverage, which needs proper use. It is a double-sided sword as it offers great rewards if used properly, and can destroy you financially if you are naïve and unprepared. Capital needed to buy options contracts is significantly lower than the underlying security cost. Yet, you can benefit the same from the price actions of the underlying security.
- If you purchased 50 shares of ABC Company at $20, then the capital requirement is 50 x $20 = $1000. If the stock price increased to $25 [$5] per share and you decided to sell, then you could earn a profit of $250.
- If you invested in Company ABC’s call options trading at $2 with strike price $20, then with $1000 [$1000/$2 = 500 shares] you got five contracts [1 contract includes 100 shares]. It means you control 500 shares of Company ABC with an investment of $1000. With $1000 investment you got 10X more shares. If the price increased to $25, and you sold the options, then you could earn a profit of $2,500
Important note – Using leverage multiplies your profit, but even understanding the role moneyness plays like out-of-money has high leverage, which is followed by at-the-money and in-the-money option contracts, the leverage is lowest.
Customize your strategy
Investors can customize their options strategies based on investment theories about a specific stock.
- Choose a trade time frame of a few hours to as long as two years.
- Profit from fear level changes or the passing of time in the marketplace.
- Profit when the stock price remains in a specific range or rises or decreases or moves a little against your position.
- Generate monthly income on shares you own as you wait to sell than at high prices using a covered call strategy.
- Make monthly income on the shares, you are waiting to buy at a low price with a put-selling strategy.
Flexibility to choose your probabilities
If you prefer to buy a stock, then the hope is for a significant increase in its price to earn profits. In the short-term, the probability of stock’s current price rising or falling is projected to be 50%. It means your probability to make money from selling or buying stock is estimated to be 50%. With options, this projected probability to make a profit is above or below 50%.
Option traders get to choose money making probabilities on the ratio between risk and reward associated with their anticipated strategy. E.g. traders who choose to sell options have more risk potential, therefore their profit expectation is greater than 50%. On the other hand, traders who choose buy options have low-risk potential therefore their profit likelihood is lower than 50%.
Important note – Remember, the higher the reward potential the higher the risk level is. You get to choose on which side of the equation you wish to be. You can even balance some low probability trades with a few high potential ones.
Great tool for risk management
Options are a great alternative to reduce existing stocks’ long position risk. For example, if the share prices of PM Digi Company are expected to drop, then concerned investors can purchase puts.
It offers them a right to sell at a strike price even if the market price drops low before expiration. The investor insures against the losses below the strike price. This practice is called hedging.
Options are stock derivatives. It means their prices get derived from stock they get traded against. So, they complement stock investments. Investors can do both and –
- Use options to earn monthly income on the underlying stock they already own.
- Lock in profits or reduce the risk of stock position.
- Calculate the projected probabilities of a particular stock price fluctuation anytime.
- Look at specific options prices and gauge the market’s opinion of that specific stock risk level.
Important note – Stock investors with knowledge of options can do both, why limit themselves?
You will stay updated with the economy
Stock investors buy shares, and for months they hardly check the market because the stock investment is generally long-term. Alternatively, options traders are active in placing, closing, and adjusting their trades. Most of the trades are short-term. As the traders get more market exposure, they are more in sync with the specific share and macroeconomic events.
Important note – More exposure to the trade market means a high probability to stumble on attractive investing opportunities.
Options trading are thrilling and fun
Investing in options offers flexibility and versatility. It doesn’t matter if you use it for steady monthly income, aggressive speculation, or risk reduction. It is simple, thrilling, and fun!