Conventional wisdom tells us to put our money on an investment vehicle we are most familiar with and on investment vehicle we can benefit the most. Since understanding the rise and fall of stocks is much less difficult than studying the basics of options trading, it is a more popular choice for the many. But the truth is options trading provide a number of advantages than any other investment channels, as well as the stock market or even the Forex trading.
Let us look at some:
Buying a call option offers the shareholder a respectable option position that is comparable to stock position. For example, if an investor would buy 300 stocks at a price of fifty dollars for each share, he would have to shell out $15,000.
On the contrary if he would prefer to purchase three twenty dollar calls (each deal representing 100 lots or shares), he would 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 procedure is obviously not as simple as that. The investor will have to identify which call to purchase to attain a respectable option position, similar to stock position. Nevertheless, if you are scouting for a decent investment without risking large amount of cash at once, option trading is the better option.
Investment is said to be for the risk takers. This is agreeable if your risk automatically yields to profit. But that is not constantly the case.
In options trading, however, you can have unlimited profit capability and at the same time enjoy lower risk. This is because options trading only give you the right to buy or put on the market underlying asset, and not the obligation.
This simply means that, if the value is not right at the end of the contract, you can just disregard and let the contract expire. If, however, you can benefit for the change in shares prices, you can assert your right and pursue the contract.
As an example, you purchase a particular call option for $20 (strike price) that will terminate on the third Friday of March. On the expiry date, shares you bought are trading at $25. Certainly, you can right away earn $5 per share and would have to pursue with the contract.
What if the at the expiry date is lower than the strike price?
Let us suppose that the shares you have decided to buy gone down to $15 or even $5 at the end of the contract, do you have to pursue the contract? No!
You just have to let the contract expire.
What have you lost then?
The option premium you paid the vendor. Nothing more.
Unlimited Profit Potential
For example a particular call option you have bought is now trading at thirty eight dollars per share. You can apply your right to procure it for the strike price of twenty dollars and make $18 minus the Option Premium you have paid. This is just an illustration.
The value of shares can go higher than that. Furthermore if you have delicately selected your call, you can get the finest income without breaking your bank.
If you are planning to pursue the contract and procure the shares, remember that you have to pay the full amount. So at the expiry date, be sure that that you retain you the cash.
NOTE: If you’re really interested to learn options trading then you can watch the stock trading video training courses. It’s a membership site full of actual tips and tutorials about making money with option trading.