Words like "risky" or
"dangerous" have been incorrectly attached to options by the
financial media and certain popular figures in the market. However, it is
important for the individual investor to get both sides of the story before making
a decision about the value of options.
There are four key advantages that options may
give an investor: they may provide increased cost efficiency; they may be less
risky than equities;
they have the potential to deliver higher percentage returns; and they offer a
number of strategic alternatives. With advantages like these, you can see how
those who have been using options for a while would be at a loss to explain
options' lack of popularity in the past. Let's look into these advantages one
by one.
1. Cost Efficiency
Options have great leveraging power. As such, an investor can obtain an option position that will mimic a stock position almost identically, but at a huge cost savings.
Options have great leveraging power. As such, an investor can obtain an option position that will mimic a stock position almost identically, but at a huge cost savings.
2. Less Risk
There are situations in which buying options is riskier than owning equities,
but there are also times when options can be used to reduce risk. It really
depends on how you use them. Options can be less risky for investors because
they require less financial commitment than equities, and they can also be less
risky due to their relative imperiousness to the potentially catastrophic
effects of gap openings
3. Higher Potential
Returns
You don't need a calculator to figure out that if you spend much less money and make almost the same profit, you'll have a higher percentage return. When they pay off, that's what options typically offer to investors.
You don't need a calculator to figure out that if you spend much less money and make almost the same profit, you'll have a higher percentage return. When they pay off, that's what options typically offer to investors.
4. More Strategic
Alternatives
The final major advantage of options is that they offer more investment alternatives. Options are a very flexible tool. There are many ways to use options to recreate other positions
The final major advantage of options is that they offer more investment alternatives. Options are a very flexible tool. There are many ways to use options to recreate other positions
