Why Trade Options?

May 15, 2020

Trading options offer several advantages to just trading stocks.

Limited Risk – Buying a call or put option offers the trader unlimited potential profit and limits maximum risk to the price premium paid for the option. Conversely, the options seller has unlimited risk and can only profit by the amount of option premium collected. For this reason, most retail options traders are call and put buyers.

Leverage – Options buying allows you to control a larger stock position with less capital than buying the stock directly. However, with this larger market exposure comes the potential for losses. Always have appropriate risk management in place to guard against a big move against your futures position.

Flexibility – When buying or selling stock, you can only trade two directions- up or down. Combining both buying and selling options in the same position, offers a wider variety of market conditions you can trade, such as up, down, quiet markets, active markets and increasing or decreasing volatility.

Income Generation – One of the reasons traders and investors trade options is to help produce income. There are options strategies that can be employed to allow you to collect option premium.

Hedging – Anyone who has a portfolio of stocks can use options to help reduce risk in the event of a market downturn by buying put options.

Note: Most options contracts expire worthless, where the price of the underlying stock did not exceed the strike price target, which means the premium paid by the option buyer was lost.

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