Why Options are Safer than Stock!

We prefer to trade in options rather than stock.

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

Well, what is the truth?

Firstly we need to have a look at owning stock; what are the up sides and down sides to owning stock?

The stock price goes up.

The price can go down.

Its value can go sideways.

In the first case, you can make money. In the second you lose money.

However if there is sideways movement you will not directly gain or lose money. You will however incur costs through brokerage fees directly and indirectly lose money through what is know as "opportunity cost."

This is where you are unable to invest in new opportunities and therefore miss out on the potential profit.

In conclusion the only way you can profit when owning stock is when its value goes up.

At this point you may say what about shorting stock?

Well yes, short selling stock is possible but it is quite a tricky strategy and has almost unlimited risk so it is certainly not an approach we 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.

Do you see what the risk is?

The risk is the value of the stock going up; especially if it goes 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.

Now there is one other aspect to this that I want to address. And this is that owning stock is expensive!

Consider buying 200 shares at $25 the cost would be $5000. Should you buy at on the margin it will still cost $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.

In addition to this, due to the unpredictability of stock trends you need to be able to get the timing right.

So stock trading is not that easy. And it's expensive.

But options provide a great 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.

Taking the example above that's investing $100 instead of $5000.

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

And finally, your risk is limited. The maximum you can lose is the amount you put into the trade. So in the example above - $100.

You should also consider the leverage that options give you.

Taking the example above if the price were to go up by 10% then your profit would only 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 don't just accept the common view that owning stock is safe and trading options is dangerous. If you understand options and learn how to trade them they can be a great investment vehicle.

The above comments are offered for educational purposes only. We are not providing you with financial advice. We are simply sharing with you what has and hasn't worked for us personally. If you wish to trade or invest in the stock market you should obtain advice from a registered licensed advisor.

Article Source: http://www.aword2thewise.com

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