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Our trading preference is stock options. But you have probably been told or read that options are risky. Even worse, that you can lose your shirt trading them! Who can you trust? I want to take a few minutes and look at stock ownership. What are the possibilities when you buy stock? The stock price goes up. The stock price goes down. The stock prices moves sideways. In the first case, you can make money. In the second you lose money. With a sideways move your stocks value dose not change; it dose however cost you, indirectly, through indirect opportunity costs and direct fees and brokerage charges. This is the cost due to lost opportunities. The fact that you aren't able to be involved in other, potentially profitable trades. In conclusion the only way you can profit when owning stock is when its value goes up. Now some of you may be thinking, "But what about shorting?" Again this is another possibility but is does involve some complicated strategies coupled with uncapped risk. Based on this it is not an approach we would recommend. To explain - when shorting stock you are selling stock you actually don't own. Your plan here is to sell high and buy back low. The difference in price is what makes up your profit. Do you see what the risk is? Can you see what would happen if the stock price went up? Also what would happen if it when up a lot? Having sold the stock at a lower price you are forced to buy it back at a loss; these losses can be very high. 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. This is large outlay and therefore a large risk; even more so if you take into account you have a 1 in 3 chance of the value increasing. Plus as stocks don't trend all that often you not only need to pick the right direction, you also need to be able to pick the right time. So stock trading is not that easy. And it's expensive. A good alternative is buying options. Options require lower investment, costing approximately 2% of the value of the stock while still giving you control over the same number of shares. So in the example above, instead of investing $5000, we might only have to outlay $100. 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. A major advantage of options is the leverage they provide. In the above example, if the stock price goes up by $5, the profit on the stock trade would be 10% or on margin, 20%. But with a similar increase in prices the value of your option may increase by 100%. This would give you a profit of 100% - this is ten times more profit than on the standard 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. We offer the information in this article for educational purposes only. It is not to be used nor is it provided as financial advice. It is provided based on our own experiences of what has worked for us personally. If you are planning to trade or invest in the stock market you should seek advice from a registered licensed advisor.
Article Source: http://www.financemanual.com
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