Learn About the Top 10 Reasons To Start Options Trading
Why Trade Options?
What exactly can one get out of putting in the time and energy to learn about this financial instrument?
In this free options trading tutorial, I shall attempt to answer the most fundamental question in options trading ever; Why trade options?
After so many decades of development along with centuries of existence, options trading remains one of the most obscured and misunderstood
investment method in the world today. Options are one of the most powerful financial instruments ever created but they are also one of the most complex and
with the many barriers to entry as well as difficulties to overcome in order to even open an options trading account, people often ask themselves
why they should even bother learning about options trading when there are simpler means of investing such as stocks. This tutorial shall attempt
to provide some reasons why options is something every savvy investor and trader should know and use.
Options Trading Reason 1: Do More With Less!
Options is leverage. Leverage means you can do the same thing with lesser money or even do more with lesser money than you can with conventional investment means.
Leverage is expressed in options trading through allowing you to trade in stocks using only a small fraction of its price! For example, AAPL (Apple Inc.) stocks
are trading for $101.87 at the time of this writing. In order to buy 100 shares of AAPL stocks, you would require $101.87 x 100 = $10,187 . However,
you can trade the profits on 100 shares of AAPL simply by buying its $101 strike price call options for only $2.30 per contract which amounts to only $2.30 x 100 = $230!
Yes, you can control the profits of 100 shares of AAPL stocks if it rises with just $230 if you traded its options rather than its stocks for $10,187! This makes
options trading a great choice for traders with only very little money to invest with but wishes to participate in the moves of these great companies. This leverage
also allows traders with only very little money to start with to make meaningful amounts of profit through this leverage effect of options.
Learn more about options leverage.
Options Trading Reason 2: Take Less Risk Than Trading Stocks!
Contrary to popular belief, trading options can actually be less risky than trading the same amount of stocks! Too much improper use of options leading to catastrophic
losses and account wipeouts have been popularised by the media to the extent that most people think options trading is extremely risky. In fact, this belief is so
widespread that over the last few decades it has become increasingly difficult to open an options trading account as regulators also believe that options are riskier
than stocks. How can options actually be less risky than stocks? By the fact that you risk no more than the money you use towards the purchase of the options! Yes,
taking our 100 shares of AAPL stocks example above. As a stock trader, you are risking the whole $10,187 in the trade while the options trader risked only $230
(and no more!) in trading that same 100 shares! If AAPL drops by 10% from $101.87 to $91.68, the stock trader loses $1,018.70 while the options trader only loses
$230 no matter how low AAPL goes to, even to $0!
Read about how Options is less risky than stocks!
Options Trading Reason 3: More Ways to Win Than Trading Stocks!
When you trade stocks, that is to say, when you buy stocks, you only win when the stock goes UP. There is no other ways to win as you make nothing if the stock didn't
move and you make a loss when the stock goes down. However, that is not the case in options trading! Through the use of options strategies, you could in fact win
in more than one directions at the same time! For example, you could win when the stock remain stagnant or move in a single direction, you could win when the stock
goes either up or down in either direction, and you could even win when the stock remain stagnant, move up a little or move down a little, in all 3 directions! How's
that for increasing your chances at winning? The creative use of these options strategies is the real magic behind options trading which makes options trading abit
of a financial alchemy.
Learn more about options strategies!
Options Trading Reason 4: It's Mathematical Fun for Geeks!
Oh yes, if you are a maths geek or a quant geek, you would be absolutely blown away by what you could do when you apply complex mathematical calculations to the
construction of options positions. In fact, with the correct calculations and formula, you could create options positions that does absolutely everything precisely
how you wish it to! The real magic of options strategies are released when you start creating your own payoff profile calculators or trade calculators to mathematically
arrive at the exact options composition for the exact payoff and reward risk profile you are seeking to create. In fact, you could also mathematically build algorithms
to exploit the many arbitrage opportunities that an instrument as complex as options offers. Yes, every of the many options greeks can be exploited for profits!
Indeed, options is Greeks for Geeks!
Learn more about options greeks!
Options Trading Reason 5: It's Simple!
Before that last reason make you think options is too difficult for common people to learn, the fact is that options can be very simple! Yes, the beauty of options is
that is can be as complex or as simple as you want it to be! It can be complex enough to go into the realm of quantum mathematics but it can also be as simple
as opening an options trading account with renowned options brokers such as ThinkorSwim
and then buying when the stock goes up and selling when the stock goes down! Indeed, at its core, trading options is as simple as buying call options on stocks that you
think is going to go up and buying put options on stocks that you think is going to go down in order to profit when the stock goes down (akin to short a stock). Its
that simple!
Learn more about the different levels of options learning.
Options Trading Reason 6: It Works with Stocks!
Yes, if you are a stock trader, all the more reason you must learn about options trading in order to further your stock profits and also to protect your stock holdings!
Options are not only financial instruments you can trade on its own, its also something you can use as steroids or insurance for your stock holdings! If you wish to
protect your stocks from declining in value when its price drops, simply buy put options to protect those stocks! This is known as a Protective Put. If you wish to
profit on your stocks that are stable and actually not moving much, simply sell out of the money call options on those stocks and safely collect "rent money"! This
is known as a Covered Call! Protection and steroids for your stocks! Is there any reason why stock traders should not learn about options trading?
Options Trading Reason 7: Choose Your Own Risk Level!
One great thing about options that makes it better than futures (in this aspect) is that unlike the fixed leverage of futures trading that fixes the risk level you
are playing at, you can actually choose your own risk level when trading options! This means that options can be as risky or as safe as you want it to be! If you
are investing with money you can afford to lose lottery style, you could choose to trade options with extremely high level of leverage that returns hundreds of %
in profit when the underlying stock moves strongly but risk losing that whole amount of money put towards that trade if the stock didn't work out that way. For example,
if you are feeling aggressive on AAPL and you are trading with money you can afford to lose, you could choose to buy its out of the money call options for maybe
just $0.50 per contract, working out to only $50 to control 100 shares of AAPL (now, who can't afford to lose $50?). Buying this option would mean perhaps a 1000% return
should the price of AAPL rise by 10% but it only means you lose that whole $50 investment if AAPL failed to move that much. On the other hand, if you are feeling
more conservative and wish to decrease the % lose should AAPL failed to move or actually declines, you could choose options that are at the money or in the money
using the same amount of money such that when AAPL failed to move that strongly, you actually loses maybe 40% or 50% rather than 100% of that money, thereby decreasing
the risk level of the trade. So, in options trading you can choose the risk level at which you wish to invest at! With the huge number of options contracts available
for each optionable stock, there is definitely an option or combination of options that conform to your specific risk appetite. This is something you won't get in futures trading
or stock trading.
Learn more about Options Moneyness!
Options Trading Reason 8: Options Forgives Mistakes!
When you make a mistake trading stocks, all you can do is really to watch helplessly as the value of the stock goes lower and lower without any means of intervention
in order to stop the loss or even reverse the loss. However, that is not the case with options trading! When you make a mistake with options, you could actually
transform the options position creatively in order to stop the position from making any further losses and even reverse that loss so that it start recovering into
a profit! In fact, you could even repair losing stock positions using options as well. Yes, this is why options is so fun, it gives you the power to take advantage of
any situation and change it into your advantage as long as you are creative and experienced enough with the almost limitless ways of composing options positions. No more
holding and praying, options give you the power to take the fate and outcome of your trading account into your own hands under any and every market condition!
Learn more about options stock repair strategy!
Options Trading Reason 9: Options are Highly Liquid!
Options in the US market and European markets are so highly liquid that you can trade options even if you have a very large fund. Alot of beginners are often concerned with
whether options are liquid enough to trade with a significant fund size and the simple answer is that yes, options are liquid enough to trade significant fund sizes with. As such,
if what is stopping you from trading options is that you think your fund size is too big for it, then rest assured that the options market of today is big enough and liquid enough
for very significant fund sizes. However, that being said, there will always be options contracts that may not be as liquid as you need it to be. As such, as options traders, we
need to know how to tell if an options contract is liquid enough for our trade size and simply avoid those that aren't.
Learn more about options liquidity!
Options Trading Reason 10: Options is Sexy!
Well, we can never completely ignore the ego factor when it comes to investing and trading, can we? One of the things that makes trading and investing in anything so desirable is that
it makes us look and feel like extremely saavy investors and therefore smart individuals in front of our friends, relatives and colleagues, right? Now, very few investment methods make
one look and feel smarter than trading options. As mentioned above, options have a reputation of being extremely complex and mathematically driven. When you tell your friends, family or
colleagues that you are trading options, immediately what goes into their head is that you are extremely clever and your maths must be very good. Such ego boost cannot be completely ignored
when choosing to trade options.