Many investors ignore options as being too complicated or not worth their time to understand without even considering the basic and inherent advantages of these trading instruments. Hopefully in this article I can at least uncover some of the more basic advantages to using options and make the argument if you are going to manage your own money how options can be a very viable investment alternative.
The appeal of stock options just from the leverage, flexibility and protection perspectives alone are quite powerful. For example, options allow the investor to control an underlying stock for a fraction of the price requiring far less capital outlay that it would take to purchase the asset outright. In addition, you have the benefit of having the flexibility of choosing price and time frame. Finally and most importantly, especially for the options novice, it is a great way of protecting your stock portfolio.
The first benefit is the outstanding leverage you can achieve with options. Consider if an investor had $10,000 of discretionary capital to invest in a stock. If that investor purchased 100 shares of XYZ at $91 per share they would have a capital outlay of $9,100. If the same investor purchased a 90 Call Jan 13 LEAPS option they would pay about $750 to control the some 100 shares of XYZ. Without going into specific details of volatility, times to expiration, and strike prices this should at least peak a savvy stock investor's interest.
In addition, consider the portfolio protection benefit stock options can deliver. Say an investor bought these 100 shares of XYZ at $80 per share just 10 months earlier and is now trading at $92 per share. With options an investor can protect their inherent profit by buying a Jan 13 $90 put to not only lock in the inherent profit for the relatively small premium paid for the put but insure the investor of not incurring any losses if the stock plummets below $90. Peace of mind sure but being able to protect one's portfolio and profits in turbulent times is a tremendous advantage for a person in charge of their own account growth and preservation.
Finally, depending how sophisticated you want to get with options there is myriad of alternatives available to create not only adequate protection but provide appreciation possibilities as well. The fact that you can combine both puts and calls over different time frames makes options a marvelous and very flexible opportunity to controlling stock assets. The point being once a basic understanding of options is possessed the possibilities of how to employ them are virtually endless.
The thrust of this article is not necessarily to try to convert you into pursuing options trading even though that is certainly not a bad thing. However, I want to make sure investors out there that invest in stocks and manage their own money are aware of the many advantages and benefits options can indeed provide to facilitate this pursuit. That is why you do not see any specific mention of volatility levels, expiration dates, and strike prices all of which play an important role when entering into the options arena. If anything just take a good look how employing options can be very beneficial to your stock portfolio whether it be leverage, flexibility, and/or risk control there is definitely something of value for every stock investor.
Happy Trading!
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