3 Reasons to Trade Options Right Now

The ability to customize allows options traders to fine-tune their portfolio for maximum profits

Managing Editor
Jun 8, 2018 at 1:40 PM
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    We're going back to the basics today. After highlighting various specific options strategies such as the collar or long guts recently, we're going to explain what we feel are the three biggest benefits of trading options.

    Options Offer Limited Dollar Risk and Exposure

    Quite simply, when compared to outright stock buying or shorting, you fork over fewer dollars with options. As an option buyer, you benefit from being able to control the movement of a stock for far less cost than an outright stock purchase. Plus, "vanilla" buyers of calls and puts can never lose more than this initial premium paid. 

    Let's look at an example. Consider Stock XYZ, which is currently sitting around $193. You're bullish on the equity, but to buy 100 shares of XYZ would cost you a little more than $19,000. On the other hand, you could simply buy the XYZ July 190 call for $5.40, or $540 total, since the option controls 100 XYZ shares.

    In order for the call buyer to profit on the play, XYZ has to move above $195.40 (strike plus premium paid) by July options expiration. However, if XYZ tanks to $185 in that timeframe, the most the call buyer will lose is the $540 paid at initiation, compared to an $800 loss for the XYZ shareholder.

    Options Offer Leverage

    Leverage is what you get when trading options. Although your cost of entry is lower than buying or shorting a stock, options trading does not sacrifice your earnings potential. For investors who are pleased to have called a quick 10% move in a stock, they often could have made 50%, 100%, or more buying an option on that stock. 

    For example, let's say our friend Stock XYZ skyrocketed to $200 by July options expiration. At this point, the July 190 call would have $10 in intrinsic value -- or be worth $1,000 (x 100 shares) for the buyer. That's an 85% return on investment. The buyer of XYZ shares would be up just $700 on a move to $200 in the underlying.

    Options Offer Unlimited Profit Capabilities

    Up, down, or sideways, options can profit in any environment. Whether your outlook is bullish, bearish, or something in between, there is an option trade for you. The same goes for stocks that are prone to bouts of volatility; you can even customize your strategy to be directionally neutral. This degree of customization allows options traders to fine-tune their portfolio for maximum profits.

    Profits are not limited by time frames, either. For example, weekly options that expire every Friday allow you to speculate on a very short-term directional move with decreased exposure to time decay. On the flip side, LEAPS expire years in the future.


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