4 compelling reasons why options trading reigns supreme
Options have existed for over 40 years, but they’re now getting the attention they deserve. Many traders have avoided options for years because they believe they are sophisticated and difficult to understand. However, many have had bad experiences with options because they used the wrong brokers or went in without in-depth knowledge of options trading, as discussed in this article from TimothySykes.com.
However, contrary to popular belief, options trading reigns supreme, and there are many compelling reasons why it’s worthy of consideration for anyone looking to invest. This blog details the main reasons for trading options and why they can greatly complement your investing strategy.
Versatility and flexibility
One of the most appealing elements of trading options is their flexibility and versatility. This is in contrast to other types of passive investment, where there are limited strategies and income-generating methods. For instance, you can only use two ways if you’re buying stock using a buy-and-hold approach. You can buy stocks that appreciate over time or invest in stocks that offer regular dividend payouts.
Conversely, options can be bought and sold based on many underlying assets. In addition to speculating on the price movements of stocks, you also have the chance to speculate on the price movements of foreign currencies, commodities, and indices.
The range of options trading strategies is also huge. Spreads offer a lot of flexibility in the way you trade. So, whether you’re looking to reduce the upfront cost of taking a position, limit the risk of taking that position, or attempt to profit from price movements in different directions, the spreads make for true versatility.
Ability to use leverage
Options allow you to use leverage and trade with less money on the line. With options trading, leverage will enable you to use less money to gain exposure to the movement of the price of stocks. In other words, you similarly gain exposure to the market by owning stocks, but you commit less money to the options.
As an investor, you can buy and sell options more regularly than stocks and other passive investments. What’s more, if losses are incurred, they are usually limited to the option’s price because options are a form of derivative investment. That said, options can be much cheaper than buying shares of stock.
Reduced risk
There are times when options trading is riskier than owning equities. Still, there are situations in which an investor can use options to reduce risk. The level of risk depends on how you use them.
If used properly, options can be less risky because they require less financial commitment and are relatively impervious to the effects of gap openings. Options are safer than stocks and are easily the most reliable form of hedge.
Higher potential returns
One of the best reasons options trading reigns supreme is that it has higher potential returns without necessarily requiring large sums of money. You spend less and make almost the same profit, giving you a higher percentage return. For this reason, options trading is ideal for investors with little starting capital and those with bigger budgets.
The potential for higher returns is largely tied to the use of leverage. Simply put, you can use leverage to gain more trading power from your capital.
Final word
Options trading offers investors flexibility, leverage, reduced risk, and higher potential returns. With these characteristics, it’s evident why options are at the center of attention in financial investment circles. Take the initiative to learn how to use options because this investment requires diligence.